FEDERAL COMPETITION AND CONSUMER

PROTECTION COMMISSION

MERGER REVIEW GUIDELINES

2020

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Merger Review Guidelines

The Federal Competition and Consumer Protection Commission (the Commission) is the

regulatory authority responsible for, among other things, the administration and enforcement

of the Federal Competition and Consumer Protection Act 2018 (the Act). The Commission

contributes to the economic development of Nigeria by protecting and promoting competitive

markets and enabling informed consumer choices.

These Guidelines describe the Commission's general approach to administering the Act's

merger review process applicable to proposed transactions that are the subject of a merger

notification.

Overview

Legal review of mergers is an essential element of competition policy. For Nigeria’s market

economy to function optimally, and benefit citizens, rules are required to ensure combinations

do not result in adverse effects on competition. By providing a system of prior review of

concentration, the merger review function of the Commission is primarily prevent market

structure that could likely impede incentives for enterprises to compete in Nigeria’s markets.

The Commission recognises that majority of mergers do not present competition concerns and,

indeed, may enhance efficiency. Nonetheless, periodically, certain transactions could

potentially substantially prevent or lessen competition, thereby having a negative impact on

consumers, businesses and the overall competitiveness of the economy. The Commission

reviews these transactions with to fulfill its mandate to protect and promote competitive

markets. In discharging its merger review obligations under the Act, the Commission's priority

is to timely identify proposed mergers that could constitute a threat to competitive markets and

to allow those that don’t to proceed as expeditiously as possible.

Preserving competition, in merger review as in all areas of competition policy, is not, however,

an end in itself. The ultimate goal is the promotion of economic performance, and in particular

protection of consumer welfare. By seeking to preserve the competitive process, merger review

plays an important role in guaranteeing efficiency in production, in preserving the incentive

for enterprises to innovate, and in ensuring the optimal allocation of resources within the

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economy. Consumers are the beneficiaries of a properly conducted enforcement policy,

enjoying fair prices and a wider choice of products and services as a result.

These guidelines outline the general principles guiding the Commission’s merger analysis

under Part XII of the Federal Competition and Consumer Act 2018 (the Act). The Guidelines

expand on the procedural and substantive framework under the Merger Review Regulations

2020, expounding the principal analytical techniques, practices, and the enforcement policy of

the Commission with respect to mergers.

With these Guidelines, the Commission seeks to identify the bases upon which it would

challenge competitively harmful mergers while avoiding needless intervention with mergers

that are either competitively beneficial or neutral. Most merger analysis is necessarily

predictive, requiring an assessment of what will likely happen if a merger proceeds as

compared to what will likely happen if it does not. Given this inherent need for prediction,

these Guidelines reflect the legislative intent that merger enforcement should check

competitive problems in their nascency.

The approach to merger assessment has been developed to outline the considerations that guide

the Commission’s merger review as well as the statutory factors relevant to the assessment.

There is also an emphasis on the competitive theories of harm and the effect of constraints,

which facilitates a more integrated analysis.

The Commission will continue to assess each merger on its merits according to the specific

nature of the transaction, the industry and the particular competitive impact likely to result in

each case. The general principles set out in these guidelines provide a framework within which

mergers will be reviewed. Importantly, the application of those principles to different facts and

situations may give rise to different results. Where these Guidelines provide examples, they

are illustrative and do not exhaust the applications of the relevant principle.

These Guidelines also describe the main types of evidence upon which the Commission usually

relies to predict whether a merger may substantially prevent or lessen competition. These

Guidelines should provide an enhanced level of predictability and certainty to merger parties,

their advisers, the business community and the public, by increasing the transparency of the

analytical process underlying the Commission’s enforcement decisions. They may also assist

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the adjudicatory process in developing an appropriate framework for interpreting and applying

competition laws in the merger review arena.

It is not possible for these guidelines to cover every issue or circumstance that may arise in a

merger review. In practice, individual mergers involve a great variety of facts and situations,

and the analysis of particular issues may need to be tailored to the specific circumstances of a

merger or deal with competition issues not specifically considered in these guidelines.

Accordingly, the Commission proposes to apply the Guidelines flexibly.

The unifying theme of these Guidelines is to interpret legislative intent that mergers should not

be permitted to create, enhance, or entrench market power or to facilitate its exercise.

These Guidelines reflect the views of the Commission at the time of publication. Markets,

economic theory, legal thinking and best practice evolve; the Commission may revise the

Guidelines from time to time to reflect developments and may publish new or supplemental

guidance. The latest version of the Merger Review Guidelines is always that appearing on the

FCCPC’s website.

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INDEX OF GUIDELINES Part 1- Purpose and Definitions

Introduction ........................................................................................................................ 6 Purpose and Scope .............................................................................................................. 6 Note on Terminology .......................................................................................................... 8

Part 2- Mergers Subject To The Act (“Covered Transactions”)

Criteria for a relevant merger situation ........................................................................ 9 Exemptions………………………………………………………………………..… 11 Persons Subject to the Act…………………………………………………….…….. 12 Types of Acquisitions ………………………………………………………………. 12

Types of Covered “Merger” Transactions ……………………………..……12 A. Share Acquisition…………………………..……………….…...………. 12

Ordinary Course Exemptions……………………….………………. 12 Control………………………………………….………..………..… 13 Material influence ………………………………..………………….15

B. Asset Acquisitions……………………………………..………………… 17 C. Joint Ventures…………………………………………..………............... 18

Part 3- Standard of Review

Prevention of competition……………………………………………...…………….21 Lessening of competition…………………………………………….……………... 22 Substantiality…………………………………………………………..……………..23 With and without test (The ‘counterfactual’)……………………………………….. 24

Part 4- Market-Related Analysis

Market Definition…………………………………………………………………….27 Product market definition……………...……………………………………………..31 Geographic market definition…………..…………………………………………….33 The Synthesised Tripod Inquiry………………..…………………………………….35 Other Relevant Considerations………………………….……………………………36 Chains of Substitution…….………………………………………………………….37 Implementing the SSNIP Test………………..………………………………………37 Market Participants…………………………………………………………………. 41 Calculating Market Share……………..…………………………………………….. 41 Market Concentration ………………………………………………………………. 43

Part 5- Merger Analysis (Factors in Section 94) Actual and potential import competition (Section 94(2)(a))………………………….47 Barriers to Import Expansion……………………………………………………........48 Qualitative Information and Evidence for import competition ………………………49 Ease of Entry…………………………………………………………………………50 Conditions of entry…………………………………………………………………...50 Timeliness………………………………………………………………………........50 Likelihood……………………………………………………………………………51 Sufficiency…………………………………………………………………………...52 Types of barriers to entry ……………………………………………………………53 Information and Evidence to Prove Entry……………………………………………54 History of Collusion………………………………………………………………….58

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Countervailing Power………………………………………………………………58 Information and Evidence for Countervailing Power ………………………………57 Dynamic characteristics of the market ……………………………………………..57 Vertical Integration in the market…………………………………………………..59 Information and Evidence to Prove Vertical integration …………………………..59 Failing Firm…………………………………………………………………………60

Removal of an Effective and Vigorous Competitor…………………………………61 Part 6- Anti-Competitive Effects and Theories of Harm

Types of Merger…………………………………………………………………….64 Theory of Harm and Effects…………………………………………………………64 Unilateral Effects……………………………………………………………………65 Firms in differentiated product industries…………………………………………..66 Firms in homogeneous product industries………………………………………….67 Bidding and bargaining markets…………………………………………………....68 Other Relevant Considerations…………………………………………………….68 Empirical tests for Unilateral Effects………………………………………………71 Coordinated effects ………………………………………………………………...72 Coordinated conduct ……………………………………………………………….73 Factors Conducive to Coordination ………………………………………………..73 Incentives for Coordination ………………………………………………………..75 Non-horizontal (vertical and conglomerate) Effects ………………………………75 Foreclosure …………………………………………………………………………76

i. Enabling Price Discrimination ……………………………………………......77 ii. Exclusionary Motives ………………………………………………………………77

Information required for Foreclosure Analysis…………………………………….78 Evaluative Factors …………………………………………………………………79 Examples of Problematic Non-Horizontal Mergers………………………………..80

PART 7: The Offset or Trade-Off Exceptions in Phase 2 Review

Process…………………………………………………………………………......83 Efficiency Test……………………………………………………………………..84 Types of efficiencies generally included in the trade-off…………………………..85 Types of efficiencies generally excluded from the trade-off……………………….87 Evidentiary Requirements …………………………………………………………87 Burden on the parties……………………………………………………………….88 Public Interest Gains……………………………………………………………...88 Ground One- Particular Industrial Sector or Region……………………………….89 Ground 2: Employment losses……………………………………………………..89 Ground 3- the Ability of National Industries to Compete in International Markets………………………………………………….91 Ground 4- the ability of small and medium scale enterprises (SMEs) to become competitive……………………………………………………………...92

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PART 1: PURPOSE AND DEFINITIONS

Introduction

1.1 Mergers and acquisitions are important for the efficient functioning of the economy.

They allow businesses to achieve efficiencies, such as economies of scale or scope, and

diversify risk across a range of activities. They also provide a mechanism to replace the

managers of underperforming firms.

1.2 In the vast majority of mergers, sufficient competitive tension remains after the merger

to ensure that consumers and suppliers are no worse off. Indeed, in many cases

consumers or suppliers benefit from mergers. In some cases, however, mergers have

anti-competitive effects. By altering the structure of markets and the incentives for

firms to behave in a competitive manner, some mergers can result in significant

consumer detriment.

1.3 The merger review function of the Federal Competition and Consumer Protection

Commission ("Commission") covers mergers notified to it under Part XII of the Federal

Competition and Consumer Protection Act 2019 (the "Act"). The relevant test for the

Commission's merger review function is the substantial prevention or lessening of

competition ("SPLC") test.

Purpose and Scope

1.4 These Guidelines state the policy of the Commission with respect to merger review. By

stating its general policy, merger parties, advisers, the business community and the

public have certainty regarding the considerations that apply to merger review.

However, these Guidelines cannot remove judgment and discretion in merger review.

The Commission evaluates each case in light of its own facts and apply the analytical

framework set forth in these Guidelines reasonably and flexibly.

1.5 These guidelines provide an outline of the broad analytical framework applied by the

Commission when assessing whether a merger is likely to substantially prevent or

lessen competition under Part XII of the Act. These guidelines have been developed by

the Commission in relation to its functions under Part XII of the Act.

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1.6 These guidelines are designed to provide reliable, comprehensive and detailed

information that merger parties, the business community, their advisers and the public

can draw on to:

(a) assess the likely level of scrutiny a merger will receive from the Commission —

in particular, guidance is provided on when merger parties should notify the

Commission of a merger (the threshold for notification is outlined in Part 2);

(b) increase understanding of the application of Part XII of the Act;

(c) assist in structuring (or restructuring) mergers to avoid raising competition

concerns;

(d) identify the types of information and evidence that will assist the Commission to

reach a view on how a merger is likely to affect competition. To make informed

and timely decisions, the Commission relies on the cooperation of the merger

parties, customers, competitors, suppliers and any other persons or bodies holding

relevant information;

(e) identify the Commission’s broad approach to assessing efficiencies and public

interest gains.

1.7 "Merger" is used in these Guidelines to mean a merger or acquisition as defined in the

Act (section 92(1)). The MRR elabourates on the circumstances that the merger

connotes in the context of acquisitions and joint ventures.

1.8 SPLC means substantial prevention and lessening of competition as specified by the

Act.

Note on Terminology

1.9 In these Guidelines:

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• all references to statute, unless otherwise stated, relate to the Federal

Competition and Consumer Protection Act 2018—referred to throughout as ‘the

Act’ and all references to ‘section(s)’, unless otherwise stated, relate to the Act;

• situations leading to an SPLC are generally described in the future tense,

regardless of whether the merger involved is completed or anticipated;

• the term ‘products’ is used to apply to goods and/or services;

• the term ‘price’ is used as shorthand for all aspects of competition unless

otherwise specified; and

• the term ‘undertaking’ includes any person, unincorporated or incorporated,

involved in the production of, or the trade in, products and is used

interchangeably with the terms “firm” and “company”.

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PART 2: MERGERS SUBJECT TO THE ACT (“COVERED TRANSACTIONS”)

2.1 There are two broad questions for the Commission in any merger:

• has a relevant merger situation been created (or for anticipated mergers, are

arrangements in progress or in consideration which, if implemented, will result in

the creation of a relevant merger situation); and if so

• does the creation of that situation result, or may be expected to result, in an SPLC

within any market or markets in Nigeria for goods or services?

2.2 The Commission is not required to consider the second question if it decides that no

relevant merger situation exists or will do so.

Criteria for a relevant merger situation

2.3 A merger must meet both of the criteria below to constitute a relevant merger situation

for the purposes of the Act:

• two or more undertakings must come under common control, or there must be

arrangements in progress or in contemplation which, if carried into effect, will lead

to the undertakings to be under common control to be distinct; and

• either the value of Nigerian turnover of the undertaking which is being acquired

exceeds the prescribed threshold (known as ‘the turnover test’—see relevant

paragraphs of Threshold Regulations).

2.4 An undertaking may comprise any number of components, most commonly including

the assets and records needed to carry on the business, together with the benefit of

existing contracts and/or goodwill. In some cases, the transfer of physical assets alone

may be sufficient to constitute an enterprise, for example where the facilities or site

transferred enable a particular business activity to be continued. Intangible assets such

as intellectual property rights are unlikely, on their own, to constitute an enterprise

unless it is possible to identify turnover directly related to the transferred intangible

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assets that will also transfer to the buyer. The business acquired may no longer be

trading but this does not in itself prevent the business from being an enterprise for the

purposes of the Act.

2.5 The following provides specific guidance about persons and the types of transactions

that are subject to the Act. This does not preclude the responsibilities of the parties to a

merger to consult the actual provisions of the Act to determine whether a particular

transaction falls within the scope of the Act. The overriding aims of the definition of

“covered transactions” are to capture those transactions that merit notification and

review as “mergers” under the Act, while at the same time providing clear and easily

understandable standards that enable merging parties to readily ascertain their

notification obligations.

2.6 The Act applies to the following acquisitions:

(a) acquisitions of property within Nigeria are covered by virtue of section 92(1),

including (but not limited to):

i. shares in Nigerian companies, wherever the transaction is entered into, as

the shares are domestically situated;

ii. domestic businesses;

iii. local intellectual property such as trademarks; and

iv. local plant and equipment.

(b) acquisitions of property wherever situated are covered by virtue of section 92(1)

and section 2(1)-(3) if the acquirer is:

i. incorporated in Nigeria;

ii. carries on business in Nigeria;

iii. a Nigerian citizen; or

iv. ordinarily resident in Nigeria.

(c) if (a) and (b) above do not apply, acquisitions of a controlling interest

(presumably shares in almost all cases) in a body corporate where that body

corporate has a controlling interest in a corporation are covered by virtue of

section 92(1).

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2.7 As a general matter, merger review is often directed at business transactions in which

two or more previously independent economic undertakings are combined in some

fashion that involves a lasting change in the structure or ownership of one or more of

the undertakings concerned.1 Under the Act, the qualifying business include some form

of merger between two or more previously independent undertakings, by the acquisition

of control or some degree of influence by one undertaking over the whole or part of

another undertaking, or by some combination of all or part of the business operations

of two or more undertakings to create a new business enterprise (e.g., consolidations,

amalgamations and joint ventures). 2

2.8 The Act also covers acquisitions of shares that, while falling short of a controlling

interest, nevertheless give rise to the potential ability of the acquiring firm to exert some

degree of influence over the acquired company. Exerting material influence in such that

the acquirer could exercise ‘control’ in a manner that could affect market outcomes

without attaining the 50% ownership threshold.

Exemptions- Internal Restructuring

2.9 Besides the case of intra-group transactions, cooperative joint ventures, transfer of non-

economic activities, the only exemption foreseen is the acquisition and resale involving

a bank or financial institution acquiring securities of an undertaking in the ordinary

course of business on a transitory basis or where the company is raising capital. Intra-

group restructuring can also be excluded from merger review because it does not change

incentives to use assets in the competitive process.

2.10 A merger within the meaning of the Act is limited to changes in control. An internal

restructuring within a group of companies does not constitute a relevant merger

situation- for example, an increase in shareholding not accompanied by changes of

control, or a restructuring operation such as a merger of a dual listed company into a

single legal entity, or a merger of subsidiaries. A relevant merger situation would only

1 Because potential competitive concerns are normally limited to some form of combination between previously independent economic actors, restructurings and reorganizations that occur within the same group (i.e., a restructuring of two wholly-owned subsidiaries by their common parent or between two divisions of the same company) are typically not subject to merger review. 2 See International Competition Network, Defining “Merger” Transactions for Purposes of Merger Review, Pg. 2

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arise if the operation leads to a change in the quality of control of one undertaking and

therefore is no longer purely internal.

Persons subject to the Act

2.11 The merger provisions of the Act also apply to all companies and other body corporates.

It also applies to government agencies (Federal, State and Local Government) or

government owned enterprises that undertake commerce (Section 5(2) (a),(b)).

2.12 The merger provisions also apply to foreign companies (though not registered in

Nigeria) who produce goods and services sold into Nigeria.

Types of acquisitions

2.13 The Act applies to both direct and indirect acquisitions. Section 92(1)(b) of the Act

makes it clear that ‘acquire’ is not limited to acquisition by way of purchase but also

includes lease.

Types of Covered “Merger” Transactions

A. Share Acquisitions

2.14 Acquisitions of shares (or other equity interests such as partnership interests) qualify as

“mergers” for merger review purposes whenever they result in an acquisition of

“control” of the target. A covered transaction arises whenever the buyer obtains a

controlling equity interest in the target. An acquisition of “control” presumptively arises

whenever the purchaser acquires a majority of the target company’s shares, such that

the purchaser obtains voting rights that permit it to control the target company’s board,

management and/or business direction.

Ordinary Course Exemptions

2.15 Section 92(3)(a)-(b) of the Act set out special rules for “ordinary course” share

acquisitions by credit institutions, financial institutions or insurance companies.

Acquisitions of securities by a credit or financial institution with a view to resale within

one year in the ordinary course of business benefit from an exemption from the

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notification requirements, as do any transfers in control of companies to liquidators in

connection with insolvency proceedings.

Control

2.16 Under Section 92(2)(f) of the Act, a requisite change in “control” may also be brought

about by acquisitions of shareholdings falling short of an outright majority stake, where

such holdings would nonetheless enable the acquirer, alone or together with other

shareholders, to block the adoption of strategic decisions, for example, through the

exercise of veto rights, or other arrangements which permit the acquirer to exercise de

facto material influence over the target.

2.17 As such, covered transactions may include both acquisitions of “sole control” by one

firm over another, and acquisitions of “joint control” of a firm by two or more firms.

2.18 “Joint control” may be achieved, for example, where a transaction results in a 50/50

equity split, such that mutual agreement is necessary for management decisions and/or

where one party is capable of exercising veto rights over proposed actions. Transactions

that involve shifts from “joint control” to “sole control” (or vice versa) may also give

rise to a qualifying change in “control.”

2.19 A company that buys or proposes to buy a majority shareholding in another company

is the most obvious example. However, acquisitions of lesser shareholdings may also

give rise to a relevant merger situation, as might the transfer or pooling of assets or the

creation of a joint venture. In this Part of the guidelines, the criteria for determining

whether there is a relevant merger situation are set out and guidance is provided on the

following:

2.20 ‘Control’ is not limited to the acquisition of outright voting control but includes

situations falling short of outright control. Section 92(2) distinguishes three levels of

interest referred to as control (in descending order):

i. Company A may acquire a controlling interest (at least 50% of the shareholding)

in Company B- this is known as ‘de jure’, or ‘legal’ control (section 92(2)(a));

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ii. Company A may acquire the ability to control the policy of Company B in one of

four circumstances (known as ‘de facto’ control) section 92(2)(b)-(e):

- As single largest shareholder;

- Ability to appoint a majority of the members of the board of directors

- As a holding company; 3

- In trustee undertakings, ability to control the appointment and votes of a

majority of trustees or to appoint or change a majority of beneficiaries; and

iii. Company A, the acquirer, may acquire the ability materially to influence the policy

of Company B, the target (known as ‘material influence’);

2.21 Section 92(2)(f) provides the Commission with a discretion to treat material influence

and de facto control as equivalent to legal control.

3 Company A as a holding or parent company essentially controls or influences Company B (called subsidiary) from a management and/or shareholding standpoint. Section 338 of the Companies and Allied Matters Act (CAMA), defines a holding company as follows: “A company is deemed to be a holding company of another if the other is its subsidiary”. A company is deemed to be a subsidiary of another if: (a) the company is a member of it and controls the composition of its Board of Directors; or holds more than half of its nominal equity share capital (b) the first-mentioned is a subsidiary of any company which is that other’s subsidiary”.

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2.22 The Commission will also seek to prevent situations in which a company acquires

control by stages or where ‘associated persons’ might act together to gain control.

‘Material influence’

2.23 The ability to exercise ‘material influence’ is the lowest level of control that

may give rise to a relevant merger situation. Under certain conditions minority

shareholdings may have anticompetitive effects. The holder of the minority interest

may have the ability to influence the target to compete less aggressively, or it may

decide to behave less competitively not to affect its financial interest in the target

company. Even with a purely passive financial interest the holder may have a unilateral

A common form of control is controlling the composition of the board without being a majority shareholder of the company. (It is contemplated that a company who nominates a person as a shareholder may wield the requisite influence contemplated under this section). This may happen by direct control of the Board or through one or more subsidiaries. The board occupies a preeminent position in the corporate hierarchy from the point of the view of enormous power it exercises, and control it secures over the management of another company. The composition of board of a company (Company B) is deemed to have been controlled, by another company (Company A) if, that Company A, without the consent or concurrence of any other person, can appoint or remove the holders of all or majority of the directors of Company B by virtue of exercise of some power inherent in it, at its discretion. Further, Company A shall be deemed to have such a power of appointment:

i. if the person thereto cannot be appointed without the exercise of the said power in his favour by Company A;

ii. that a person's appointment follows necessarily from his appointment as director in Company A; or iii. that the directorship is held by an individual nominated by Company A or its subsidiary.

In sum, a company could have a minimal amount of shareholding in the target company either through nominee arrangements or direct ownership but may have the power to control the Board of the target company in the manner described above. If it does have this power, then it would qualify as a holding company. There is no singular prescription as to the manner of securing Board control, which essentially is a matter of business practice. The source of legally enforceable power to control the composition of the subsidiary’s board might be found in the Articles of a subsidiary company or in a separate agreement among the subsidiary’s shareholders (e.g. a shareholders’ agreement) conferring control in the holding company.

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incentive to compete less aggressively as it benefits through its minority interest if the

target faces less competition.

2.24 In assessing material influence in the context of the Act, the Commission will conduct

a case-by-case analysis, focusing on the overall relationship between the acquirer and

the target and on the acquirer’s ability materially to influence policy relevant to the

behaviour of the target entity in the marketplace. The policy of the target includes its

strategic direction and its ability to define and achieve its commercial objectives.

2.25 The acquirer’s ability to influence the target’s policy can arise through the exercise of

votes at shareholders’ meetings, together with any additional supporting factors that

might suggest that the acquiring party exercises an influence disproportionate to its

shareholding. Material influence may also arise as a result of the ability to influence the

board of the target and/or through other arrangements. In considering whether material

influence may be present by virtue of a shareholding in a particular case, the

Commission will consider not only the ownership of the shareholding but also whether,

as a matter of practice, the acquiring party is able to exert influence.

2.26 As specified in the MRR, factors that the Commission may take into account in an

assessment of a particular shareholding include, among other things:

i. the distribution and holders of the remaining shares, in particular whether the

acquiring entity’s shareholding makes it the largest shareholder;

ii. patterns of attendance and voting at recent shareholders’ meetings based on recent

shareholder returns, and in particular whether voter attendance is such that the

shareholding under consideration would be able in practice to block special

resolutions;

iii. the existence of any special voting or veto rights attached to the shareholding under

consideration;

iv. the status and expertise of the acquirer and its corresponding influence with other

shareholders; and

v. any other special provisions in the constitution of the company conferring an ability

materially to influence policy.

vi. the ownership distribution of the remaining shares and securities, including

ordinary and preference shares and any special shares

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vii. the distribution of voting rights, including any special voting rights

viii. whether other shareholders are active or passive participants at company meetings

ix. any restrictive covenants or special benefits attaching to shares;

x. any pre-emption rights in relation to the sale of shares or assets

xi. any other contracts or arrangements between the parties;

xii. the rights and influence of any significant debt holders;

xiii. the composition of the board of directors;

xiv. the company’s memorandum and articles of association

2.27 In addition to the ability materially to influence policy through the voting of shares, the

Commission’s determination may also turn on whether the acquirer is able materially

to influence the policy of the target entity through board representation. Indeed, it is

possible that board representation alone could, in certain circumstances, confer material

influence. The Commission may also consider whether any other factors, such as

agreements with the company, enable the acquirer materially to influence policy. These

might include the provision of consultancy services to the target or might, in certain

circumstances, include agreements between firms that one will cease production and

source all its requirements from the other. Financial arrangements may in certain

circumstances confer material influence where the conditions are such that one party

becomes so dependent on the other that the latter gains material influence over the

company’s commercial policy.

2.28 The following are some of the potential anti-competitive effects of shareholdings below

a level delivering control:

• horizontal acquisitions may increase interdependence between rivals and lead

to muted competition or coordinated conduct (see Part 6)

• joint acquisitions of assets by rivals may have coordinated effects

• vertical or conglomerate acquisitions may increase the acquirer’s incentive to

foreclose rival suppliers

• acquisitions may provide access to commercially sensitive information in

relation to competitors

• acquisitions may block potentially pro-competitive mergers and

rationalisation.

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2.29 Under Regulation 7 of MRR, should the circumstance (e.g. a shareholding or a level of

board representation) that confers the ability materially to influence a company’s policy

increase to a level which amounts to de facto control or a controlling interest, that

further acquisition will produce a new relevant merger situation. The same applies to a

move from de facto control to a controlling interest.

2.30 In principle, therefore, if Company A acquires Company B in stages, this could give

rise to three separate mergers: first, as Company A moves to material influence; then to

de facto control; and, finally, to legal control or a controlling interest. But further

acquisitions of a company’s shares by a person who already owns a controlling interest

do not give rise to a new merger situation.

B. Asset Acquisitions

2.31 Transactions in which the purchaser acquires all or substantially all of the seller’s

business assets will be viewed as a qualifying transaction for merger review purposes.

Asset purchases that do not constitute all or substantially all of the seller’s assets might

be subject to merger review. Here, there is no question that there has been a change in

control of the assets. Rather, the pertinent question is whether the acquired assets have

sufficient economic significance to merit merger review coverage. For example, an

acquisition of assets will only be considered a “merger” if those assets constitute the

whole or a part of an entity to which the turnover threshold can be attributed.

2.32 Importantly, acquisitions of assets “in the ordinary course of business” are exempted,

and this exempts most acquisitions of new goods, current supplies and used durable

goods. Similarly, acquisitions of certain real property assets, such as undeveloped land,

and office or residential property are also exempted as such transactions as unlikely to

raise competitive issues.

C. Joint Ventures

2.33 A joint venture (JV) occurs between two or more independent enterprises. Given the

rather flexible notion of what constitutes a “joint venture”, it might be difficult to

generalise. As a general proposition, however, joint ventures involve some pooling of

resources to create a new business enterprise on a more or less permanent basis. The

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distinguishing features of qualifying joint ventures – as opposed to mere collaborative

arrangements – include economic integration of the parties’ business activities (as, for

example, through a contribution of productive assets to a new business undertaking),

the elimination of competition between the parties in the joint venture’s field of activity

through this contribution, and the relative permanence of the joint business activity.

2.34 Where these basic criteria are met, joint venture transactions will be brought within the

general scope of merger review by reference to the fact that the creation of a qualifying

joint venture will typically involve the transfer of voting equity or assets and by

reference to the underlying combination of previously independent businesses.

2.35 Some JVs involve the integration of parts of the business activities of the enterprises to

the joint venture, including a contribution of productive assets to the new joint venture.

This can result in a reduction or elimination of competition between the parties to the

joint venture in the joint venture’s field of activity. Whether it does so depends on the

relative permanence of the joint venture and the degree of autonomy it enjoys from its

parent companies.

2.36 However, not all JVs are subject to merger control. The Commission distinguishes

between “full function” JVs and JVs that are “auxiliary” to the activities of their parent

enterprises.

2.37 A full function JV, whose assets or turnover value is above the notification threshold,

has to be notified to the Commission as a merger. By definition, such a JV performs on

a lasting basis all the functions of an autonomous economic entity, competing with other

undertakings in a relevant market, and has sufficient resources and staff to operate

independently on the relevant market. Although full function JVs would generally

conduct little business with the parent enterprises, there may be situations in which the

JV uses a parent enterprise’s networks or outlets to conduct its sales. A full function JV

may also rely entirely for an initial start-up period on sales to its parent enterprises or

purchases from them before it can become established independently on the market.

The length of the start-up period depends on the characteristics of the market concerned.

2.38 Two requirements must be fulfilled for an undertaking to be considered as a full-

functional joint venture. Firstly, such an undertaking must be jointly controlled and at

20

the same time it must perform all functions of an autonomous economic entity on a

lasting basis. Whether a joint venture operates on a lasting basis is assessed on case–

by-case basis. This criterion is usually met if a joint venture is created for an unlimited

period of time. In order to perform all functions of an autonomous economic entity, a

jointly controlled undertaking must have: a) sufficient own resources; b) autonomous

activities beyond specific functions of its parent companies; and c) sufficient degree of

operational independence on its parent companies.

2.39 By contrast, transactions which are intended to last for a definite period of time (such

as transactions aimed at performing a particular project) may be exempt.

2.40 Auxiliary JVs fulfil a specific purpose for their parent enterprises, for example in sales,

production or research and development (R&D). Such JVs will not be considered as a

merger subject to control. However, parties to auxiliary JVs may have to apply to the

Commission for authorisation under Part VIII of the Act.

,

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PART 3- STANDARD OF REVIEW

Types of Merger

3.1 These Guidelines discuss three types of merger — in each, the merger may involve

firms that are either actual or potential competitors. Mergers which may give rise to

market power can broadly be divided into three types (or combinations thereof):

i. horizontal mergers — involving actual or potential suppliers of substitutable

goods or services;

ii. vertical mergers — involving firms operating or potentially operating at

different functional levels of the same vertical supply chain; and

iii. conglomerate mergers — involving firms that interact or potentially interact

across several separate markets and supply goods or services that are in some

way related to each other, for example, products that are complementary in

either demand or supply.

3.2 The concept of “substantial prevention or lessening of competition” allows for a

situation where a merger may increase the market power of the merged firm and (some

of) its remaining competitors, allowing each of them to increase prices unilaterally in

the face of reduced competition. In other words, the conduct of the firms is not

coordinated- they are simply competing less vigorously with one another. 4 In sum, a

merger in a concentrated market can substantially lessen competition other than

through tacit co-ordination by blunting competition among the remaining competitors

in the market (and of course, ending such rivalry as existed between the merged

parties themselves). 5

SPLC as a Standard for Review for Mergers

4 ICN Merger Working Group: “THE ANALYTICAL FRAMEWORK FOR MERGER CONTROL” P. 9

5 Both unilateral and coordinated effects are discussed in Part 6 of these Guidelines.

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3.3 Section94(1)oftheActrequirestheCommissiontoundertaketwolevelsofreview.

At the first level or the first phase, the Commission determineswhether or not a

merger is likely to substantially prevent or lessen competition. Where the

Commission’sreviewisinthenegative,thetransactionwillbeapproved.If,however

there is an affirmative determination by the Commission of an SPLC, then the

Commissionwillundertakeasecondlevel/phaseofreviewwhereitlookstothetwin

andconcurrentelementsofefficiencyandpublic interestascounterweightstothe

SPLC factors. The vastmajorityof notified transactionswill endat the first phase

reviewandthisPartseekstooutlinetheattendantstandardofreviewatthisphase.

3.4 An SPLC results only from mergers that are likely to create, maintain or enhance the

ability of the merged entity, unilaterally or in coordination with other firms, to

exercise market power.

3.5 In general, when evaluating the competitive effects of a merger, the Commission's

primary concerns are price and output. The Commission also assesses the effects of

the merger on other dimensions of competition, such as quality, product choice,

service, innovation and advertising—especially in markets in which there is

significant non-price competition. To simplify the discussion, unless otherwise

indicated, the term "price" in these guidelines refers to all aspects of firms' actions that

affect the interests of buyers. References to an increase in price encompass an increase

in the nominal price, but may also refer to a reduction in quality, product choice,

service, innovation or other dimensions of competition that buyers value.

3.6 These guidelines describe the analytical framework for assessing market power from

the perspective of a seller of a product or service ("product," as defined in

section 167(1) of the Act). Market power of sellers is the ability of a firm or group of

firms to profitably maintain prices above the competitive level for a significant period

of time. From the Commission’s standpoint, it is the ability to raise prices, not whether

a price increase is likely, that is determinative.

3.7 As provided in the Merger Review Regulations and as will be considered in Part X of

these Guidelines, the Commission analyses competitive effects under two broad

headings: unilateral exercise of market power and coordinated exercise of market

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power.6 The same merger may involve both a unilateral and a coordinated exercise of

market power. A unilateral exercise of market power can occur when a merger enables

the merged firm to profitably sustain higher prices than those that would exist in the

absence of the merger, without relying on competitors' accommodating responses. A

coordinated exercise of market power can occur when a merger reduces the

competitive vigour in a market by, for example, removing a particularly aggressive

competitor or otherwise enabling or enhancing the ability of the merged firm to

coordinate its behaviour with that of its competitors. In these situations, higher

post-merger prices are profitable and sustainable because other competitors in the

market have accommodating responses.

3.8 Unless a merger is likely to have market power effects, it is generally not possible to

demonstrate that the transaction will likely prevent or lessen competition

substantially.

Prevention of competition

3.9 Competition may be substantially prevented when a merger enables the merged firm,

unilaterally or in coordination with other firms, to sustain materially higher prices than

would exist in the absence of the merger by impeding the development of probable

future competition. This typically occurs when there is no or limited direct overlap

between the merging firms' existing businesses, but direct competition between those

businesses was expected to develop or increase in the absence of the merger. It may

also occur when there is direct overlap between the merging parties' existing

business(es) and the competitive effectiveness of one of the merging firms was

expected to increase absent the merger, for example, because of the introduction of an

improved product.

3.10 In these circumstances, the Commission would undertake an evaluation of the merger

factors considered in Part 5 below. For instance, whether, absent the merger, timely

6 Although vertical and conglomerate effects are considered as a third specie, they will not attract a considerable amount of focus because they are mostly benign.

24

entry or expansion by either of the merging firms would likely occur on a sufficient

scale and with sufficient scope to prevent incumbents from exercising market power.

3.11 The following are examples of mergers that may result in a substantial prevention of

competition:

i. the acquisition of a potential entrant or of a recent entrant that was likely to expand

or become a more vigorous competitor;

ii. an acquisition by the market leader that pre-empts a likely acquisition of the same

target by a competitor;

iii. the acquisition of an existing business that would likely have entered the market in

the absence of the merger;

iv. an acquisition that prevents expansion into new geographic markets;

v. an acquisition that prevents the pro-competitive effects associated with new

capacity; and

vi. an acquisition that prevents or limits the introduction of new products.

Lessening of competition

3.12 A merger may substantially lessen competition when it enables the merged firm,

unilaterally or in coordination with other firms, to sustain materially higher prices than

would exist in the absence of the merger by shrinking or reducing existing competition.

This typically occurs with horizontal mergers when there is direct or existing overlap

between the operations of the merging firms. This can also occur with non-horizontal

mergers, such as those that foreclose rivals from accessing inputs to production.

Substantiality

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3.13 Not all mergers that lessen competition are prohibited by section 94 of the Act; only

those that lessen competition substantially are prohibited. The term ‘substantial’ has not

been defined by statute but the practice from other jurisdictions indicate that

‘substantial’ is interpreted as meaning real or of substance, not merely discernible but

material in a relative sense and meaningful.7 The precise threshold between a lessening

of competition and a substantial lessening of competition is a matter of judgement and

will always depend on the particular facts of the merger under investigation. Generally,

the Commission will take the view that a lessening of competition is substantial if it

confers an increase in market power on the merged firm that is significant and

sustainable. For example, a merger will substantially lessen competition if it results in

the merged firm being able to significantly and sustainably increase prices.

3.14 The Commission does not consider a numerical threshold for the material price

increase. Instead, it bases its conclusions about whether the prevention or lessening of

competition is substantial on an assessment of market-specific factors that could have

a constraining influence on price following the merger.

3.15 When the Commission assesses whether a merger is likely to prevent or lessen

competition substantially, it evaluates whether the merger is likely to provide the

merged firm, unilaterally or in coordination with other firms, with the ability to

materially influence price. The Commission considers the likely magnitude and

duration of any price increase that is anticipated to follow from the merger. Generally

speaking, the prevention or lessening of competition is considered to be "substantial"

in two circumstances:

• the price of the relevant product(s) would likely be materially higher in the relevant

market than it would be in the absence of the merger ("material price increase"); and

• sufficient new entry would not occur rapidly enough to prevent the material price

increase, or to counteract the effects of any such price increase.

7 See the Australian case of Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75 at 41.

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3.16 Additionally, where the merging firms, individually or collectively, have pre-existing

market power, smaller impacts on competition resulting from the merger will meet the

test of being substantial.

3.17 Generally, the Commission takes the view that a prevention and lessening of

competition is substantial if it confers an increase in market power on the merged firm

that is significant and sustainable. For example, a merger will substantially lessen

competition if it results in the merged firm being able to significantly and sustainably

increase prices.

3.18 In some markets, particular characteristics, such as the prevalence of certain types of

long-term contracts between buyers and sellers, may prevent a merged firm from

exercising any market power it gains through the merger until some point in the future

— for example, at contract renewal. If the exercise of market power is likely to be

delayed in this way, the Commission will focus on the period commencing at the point

where market power would be exercised (for example, at contract negotiations).

Likelihood

3.19 Section 94(2) of the Act requires the Commission to assess the probability that the

undertakings in the market, after the merger, will behave competitively or

cooperatively. The application of the SPLC test involves a comparison of the prospects

for competition with the merger against the competitive situation without the merger.

The latter is called the ‘counterfactual’. The counterfactual is an analytical tool used in

answering the question of whether the merger gives rise to an SPLC. Merger analysis

compares likely future states — the future with the merger and the future without the

merger. This comparison isolates the merger’s impact on competition.

3.20 The likely future state of competition without the merger (the counterfactual) will

generally be similar to the state of competition prevailing at the time of the merger.

However, in some cases taking the state of competition prevailing at the time of the

merger as the benchmark for analysis could risk attributing a change in the level of

competition to a merger, when the real cause is some other development that is

unrelated to the merger and likely to occur regardless of the merger. Focusing on the

state of competition prevailing at the time of the merger might also disguise a SPLC in

27

situations where a merger hinders or prevents competition that would otherwise have

emerged.

3.21 The Commission therefore uses information about the state of competition prevailing

at the time of the merger to inform its assessment of the likely future state of

competition without the merger. This applies to market definition and all the merger

factors outlined in Parts 4 and 5. It also applies to likely developments involving the

merger parties — in particular, mergers involving firms that are likely to be more

effective competitors in the future and those involving failing firms.

3.22 However, the Commission will not take into account counterfactuals it considers have

been manipulated for the purposes of making clearance more likely. Signs that a

counterfactual may have been manipulated include:

• a change of policy or intention by the merger parties that occurs after the merger

is proposed

• any course of action by the merger parties which cannot be demonstrated to be

profit maximising and/or in the interests of shareholders (for example, refusing

to sell the business to a strong competitor if the proposed merger does not

proceed).

Framing the Counterfactual The counterfactual lies at the heart of most competition analysis. Any effects-based analysis will involve considering what the world would look like in the absence of the conduct or agreement under scrutiny. The counterfactual appears to throw up two main challenges:

1. How to determine the correct counterfactual to assume? There may be disagreement over the precise counterfactual.

2. How to populate that counterfactual? Although competition economics provides tools

that analyse why market outcomes have arisen so that alternative market outcomes can be estimated, how accurate are they? In particular, how reliable empirical analysis of the actual market in question is when the counterfactual involves, not a slight variation, but a complete paradigm shift from the actual world.

Counterfactual analysis in different contexts:

• Whilst the counterfactual pervades all aspects of competition and antitrust law it clearly has a bigger impact in some situations than others.

• A useful distinction may be between situations that require an ex ante counterfactual analysis (i.e. speculating how the world might change going forward) from those that require an ex post counterfactual analysis (i.e. speculating how the world might have been).

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2. Competition could improve absent the merger: Cases where the merger may

prevent a more competitive merger happening may present challenging counterfactual considerations. For instance, an analysis in relation to the potential impact of a new entrant or the development of new technology would give rise to further opportunities to compete between the parties.

Market definition typically involves a counterfactual analysis through the hypothetical monopolist test: how would customers / (potential) competitors respond to higher prices for certain goods?

Determining when there are Competing Counterfactuals

Where there are competing counterfactuals choosing between them will also depend on the robustness of the evidence.

A relevant question may be whether there are situations that merit a probabilistic assessment i.e. identifying the range of plausible scenarios and attaching a probability weighting to each instead of having to identify one above all others. This receives credence from the language of Section 94(2) of the Act where the Commission is required not only to assess the strength of competition in the relevant market but the probability that the undertakings in the market, after the merger, will behave competitively.

Populating the counterfactual

A further key problem with extrapolation arises where the counterfactual is so far removed from the actual observed world i.e. paradigm shift.

Here it is necessary or appropriate to complement empirical analysis with knowledge of industrial organisation theory (i.e. how markets can be expected to work) from which inferences can be made about how we would expect firms and consumers to behave under different conditions.1

Evidence

Sources of evidence provide various degrees of uncertainty. There are two main sources of evidence:

• Empirical evidence from the actual world of how consumers and firms behave from which an extrapolation can be made.

• Natural experiments that may mirror the counterfactual and therefore provide directly relevant evidence.

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PART 4 STRUCTURAL ANALYSIS OF THE MARKET

Market Definition

4.1 The notion of the market used in competition policy is quite different from the use of

“market” made in general business contexts. Companies often use the term market to

refer to the area where they sell their products or to refer broadly to the industry or

sector where they belong.

4.2 At the outset, understanding market definition helps to clarify the role it plays in

competition cases and in merger review. One point is immediately obvious: it is

impossible to compute summary statistics (e.g. market shares) unless the scope of the

market in question has been determined. For instance, a soft drink brand may have a

high share of the “market” for premium branded cola, but will have a lower share of

carbonated drinks of all flavours, and a low share of “cold drinks” if this is taken to

include cocktails, bottled water, etc. It is, therefore, obvious that in order to discuss

market statistics, market definition is logically prior.

4.3 An incorrect narrow market definition may lead to a wrong conclusion that the market

is concentrated when it is in fact more fragmented, and that market power is present

when this conclusion is not warranted because of the existence of competitive

constraints by suppliers of substitute products or services. The opposite may be the case

when the market boundaries are drawn too widely, and the existence of market power

is masked by a picture of competition from substitute products which is not sufficiently

strong to constrain market power.

4.4 Market definition is not an end in itself. Instead it is an aid to the competitive

assessment. It provides a tool for aiding the competitive assessment by identifying those

substitute products which provide the most effective constraints on the competitive

behaviour of the parties under investigation. This allows the complex task of assessing

competition to be broken down into two steps:

(i) define the relevant market; and then

(ii) assess the nature of competition between firms within that market.

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4.5 When we define the relevant competition policy market, we are attempting to define

the set of products that impose constraints on each other’s pricing or other dimension

of competition (quality, service, innovation). A firm whose product faces close

competing substitutes will have only a limited ability to raise its price above that of

close substitutes and competition between firms will ensure that its price is driven down

close to its cost. Thus, market definition for competition policy purposes is directly

related to the concept of market power. Indeed, a common description of a competition

policy market is one which is “worth monopolising.”

4.6 In accordance with section 71 of the Act, the Commission assesses relevant markets,

from two perspectives- the product and geographic dimensions. As a general principle,

the Commission would not assume that the merging parties operate in the same relevant

market(s), even when there appears to be some overlap between their products and the

geographic areas in which they conduct business. In addition, the relevant market(s)

being analysed for competitive effects may not necessarily correspond to the product

categories or service areas established by the merging firms or their rivals for

operational purposes.

4.7 Market definition is based on substitutability and focuses on demand responses to

changes in relative prices after the merger. The ability of a firm or group of firms to

raise prices without losing sufficient sales to make the price increase unprofitable

ultimately depends on buyers' willingness to pay the higher price. Based on section

71(c) of the Act, the ability of competitive suppliers to respond to a price increase is

also important when assessing the potential for the exercise of market power.8

4.8 Market definition is a useful tool, but not an end in itself, and identifying the relevant

market involves an element of judgment. Delineating the market does not determine the

outcome of the Commission’s analysis of the competitive effects of the merger in any

mechanistic way. In assessing whether a merger may give rise to an SPLC the

Commission may take into account constraints outside the relevant market,

segmentation within the relevant market, or other ways in which some constraints are

more important than others.

8 The Commission may examine such responses later in the analysis—either when identifying the participants in the relevant market or when examining entry into the relevant market.

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4.9 The relevant market may not be the narrowest market that meets the hypothetical

monopolist test. However, to the extent that they use them, the Commission will not

normally have regard to market share and concentration thresholds calculated on

anything other than the narrowest market that satisfies the hypothetical monopolist test

(or SSNIP below).

4.10 Conceptually, a relevant market is defined as the smallest group of products, including

at least one product of the merging parties, and the smallest geographic area, in which

a sole profit-maximising seller (a "hypothetical monopolist") would impose and sustain

a small but significant and non-transitory increase in price ("SSNIP") above levels that

would likely exist in the absence of the merger. In many cases, the Commission would

consider a five percent price increase to be significant and a one-year period to be

non-transitory. Market characteristics may support using a different price increase or

time period.

4.11 The market definition analysis begins by assuming a candidate market for each product

of the merging parties. For each candidate market, the analysis proceeds by determining

whether a hypothetical monopolist controlling the group of products in that candidate

market would profitably impose a SSNIP, assuming the terms of sale of all other

products remained constant. If the price increase would likely cause buyers to switch

their purchases to other products in sufficient quantity to render the price increase

unprofitable, the putative candidate market is not the relevant market, and the next-best

substitute is added to the candidate market. The analysis then repeats by determining

whether a hypothetical monopolist controlling the set of products in the expanded

candidate market would profitably impose a SSNIP. This process continues until the

point at which the hypothetical monopolist would impose and sustain the price increase

for at least one product of the merging parties in the candidate market. In general, the

smallest set of products in which the price increase can be sustained is defined as the

relevant product market.

4.12 The same general approach applies to assessing the geographic scope of the market. In

this case, an initial candidate market is proposed for each location where a merging

party produces or sells the relevant products. As above, if buyers are likely to switch

32

their purchases to sellers in more distant locations in sufficient quantities to render

a SSNIP by a hypothetical monopolist unprofitable, the location that is the next-best

substitute is added to the candidate market. This process continues until the smallest set

of areas over which a hypothetical monopolist would impose and sustain the price

increase is identified.

Base price to be used

4.13 In the absence of pre-merger evidence of coordinated interaction, the prevailing price

at pre-merger would constitute the base price to project the increase on. The

Commission may elect not to use the prevailing price when market conditions (absent

the merger) would likely result in a lower or higher price in the future. Ingeneral,the

basepriceusedtopostulateapriceincreaseiswhateverisordinarilyconsideredtobe

thepriceoftheproductinthesectoroftheindustry(e.g.,manufacturing,wholesale,

retail)beingexamined.

4.14 Thereareinstanceswheretheprevailingmarketpricemightnotbetheappropriate

baseprice.WheretheCommissionconsidersthatprevailingpricesinagivenmarket

aresignificantlydifferentfromcompetitivelevels,itmaybenecessaryforittoassess

theeffectofaSSNIPimposeduponcompetitivepricelevels,ratherthanuponactual

prices,inordertodetectrelevantsubstitutes.

The danger of using an inappropriate price for defining markets is illustrated by a 1950’s U.S. monopolisation case. The U.S. Supreme Court concluded that a producer of cellophane did not have market power due to the strength of substitutes for cellophane. But the Court failed to recognise that these products were only good substitutes for cellophane at the monopoly prices of cellophane already charged by the defendant, i.e., at a competitive price for cellophane, these products were not economic substitutes. (Because of the product involved, the error made by the Court has become known as the “cellophane fallacy” See United States v. E.I. duPont de Nemours & Co. 351 U.S. 377 (1956).

33

4.15 Wheretheprevailingprice iswellabovethecompetitive levelbut the likely future

price is significantly closer to the competitive level (due to, for example, a likely

reduction intheeffectivedegreeofcoordination),usingtheprevailingpriceasthe

SSNIPbasepricemay lead toerroneousassessmentsof theeffectsof themerger:

wherethemergingfirmsbothproducethesame(ornearlythesame)productsitwill

tendtounderstatetheactualcompetitiveeffectofthetransactionbyincludinginthe

marketproductsthatwillnotbefactsubstitutesforthemergingfirms’productsatthe

lowerlikelyfutureprice.Ontheotherhand,wherethemergingfirm’sproductsare

only good substitutes at the (higher) prevailing price, itwill tend to overstate the

potentialcompetitiveeffectofthetransaction.Inshort,identifyingandutilisingthe

“correct” base price for purposes of the SSNIP test is important to the market

definitionanalysisandforevaluatingthecompetitiveeffectsofthetransaction.9

4.16 Itisusefultoconsidertwodistinctpurposesforusingabaseprice:thefirstisassessing

whatproductsandfirmswouldlimittheabilityofthemergingfirmstoincreaseprice

post-merger.Thesecondisassessingwhetheroneorbothofthemergingfirmshave

(significant)marketpowerpriortothemergerinordertoevaluatewhetheroneofthe

firmsmayalreadyhaveadominantposition. For the firstpurpose,using the likely

futurepriceasthebasepricetodelineatesuchsubstitutesseemsappropriate.Forthe

secondpurpose,avoidanceofthecellophanefallacywouldappeartoentailusingasa

“base”pricethecompetitivelevel.10

4.17 In some circumstances, sellers may identify and charge different prices to various

targeted sets of buyers ("price discrimination"). Sellers are able to price discriminate

when targeted buyers cannot effectively switch to other products or geographic

locations and cannot engage in arbitrage with other buyers by taking advantage of price

differences. When price discrimination is feasible, it may be appropriate to define

relevant markets with reference to the characteristics of the buyers who purchase the

product (assuming they can be delineated) or to the particular locations of the targeted

buyers.

9 ICN Report On Merger Guidelines- Chapter 2 – April 2004 , P.10 10 ibid

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4.18 The factors the Commission considers when analysing the product and geographic

dimensions of market definition are set out below.

Product market definition

4.19 For the purpose of product market definition, what matters is not the identity of sellers,

but the characteristics of the products and buyers' ability or willingness to switch from

one product to another in response to changes in relative prices. A relevant product

market consists of a given product of the merging parties and all substitutes required

for a SSNIP to be profitable.

4.20 When detailed data on the prices and quantities of the relevant products and their

substitutes are available, statistical measures may be used to define relevant product

markets. Demand elasticities indicate how buyers change their consumption of a

product in response to changes in the product's price (own-price elasticity) or in

response to changes in the price of another identified product (cross-price elasticity).

While cross-price elasticities do not in themselves directly measure the ability of a firm

to profitably raise prices, they are particularly useful when determining whether

differentiated products are substitutes for one another and whether such products are

part of the same relevant market.

4.21 Whether or not reliable statistical evidence on demand elasticities is available, the

Commission considers factors that provide evidence of substitutability, including

evidence from market participants and the functional indicators highlighted below.

4.22 The views, strategies and behaviour of buyers are often reliable indicators of whether

buyers would likely switch to other products in response to a SSNIP. For example, the

Commission would examine what buyers have done in the past and what they are likely

to do in the future as options become available, for instance, through advances in

technology. Information from industry surveys and industry participants, such as

competitors and manufacturers of the relevant product, is also taken into account. This

information advances the analysis by providing details on historical developments

(including the past behaviour of the merging parties and their rivals) and likely future

35

Illustrative Example for Choosing the Order In Which Products Are Added To The SSNIP Candidate Market

The application of the SSNIP typically starts with the product at the core of the investigation (product A), and then, if that is not a SSNIP market, add product B etc. However, this by itself gives no guidance as to which products should be added to the SSNIP candidate market, and in what order.

In a merger case all the products of the parties that wish to merge are in consideration. For each product, the product that should be introduced next is the “next closest substitute”, this being the product that exerts greatest competitive pressure on the product (s) under investigation (or set of products if the SSNIP process is already underway).

The need for adding the next closest substitute, and not just any product, can easily be seen. Suppose we start with oranges, and oranges are not a SSNIP market. If we now add pencils to the putative market, it is unlikely that a monopoly of oranges and pencils will add any market power so we will then move to the next stage. The eventual market definition might then end up as a market for “oranges, pencils, tangerines and avocadoes” (assuming the SSNIP test was satisfied after the addition of grapes). Such a market definition would be absurd. However, the reason for the absurdity is not merely linguistic, but derives from the fact that pencils are not a substitute for oranges, let alone the closest substitute.

However, suppose we added mangoes and assume that mangoes are, in fact, a very weak substitute for oranges (and certainly a weaker substitute than tangerines and avocadoes). In that case we could easily end up with a market definition of “oranges, mangoes, tangerines, and avocadoes” that appeared plausible but was actually as absurd from an economic point of view as a market for “oranges, pencils, tangerines, and avocadoes”, since a SSNIP might already have been profitable for “oranges, tangerines, and avocadoes”. Again, the problem is caused by extending the putative market

developments in the industry. Pre-existing documents prepared by the merging parties

in the ordinary course of business can also be very useful in this regard.

4.23 Various functional indicators help to determine what products are considered

substitutes, including end use, physical and technical characteristics, price relationships

and relative price levels, as well as buyer switching costs, as discussed below. Buyers

may not view products purchased for similar end uses as substitutes. Therefore,

functional interchangeability is not sufficient to warrant inclusion of two products in

the same relevant market. In general, when buyers place a high value on the actual or

perceived unique physical or technical characteristics of a product (including

warranties, post-sales service and order turnaround time), it may be necessary to define

distinct relevant markets based on these characteristics.

4.24 Switching costs may discourage a sufficient number of buyers from purchasing

products that are functionally interchangeable, thereby allowing a hypothetical

monopolist to impose a SSNIP. Products are not included in the same relevant market

when costs that must be incurred by buyers are sufficient to render switching unlikely

in response to a SSNIP. Examples include costs for buyers to retool, re-package,

undertake product testing, adapt marketing materials and strategies, terminate a supply

contract, learn new procedures or convert essential equipment. Other costs include the

expense (and risk) buyers must incur when a product fails to satisfy expectations, which

may damage a buyer's reputation as a reseller, or require the shutdown of a production

line.

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Geographic market definition

4.25 For the purpose of geographic market definition, what matters is not the identity of the

sellers, but buyers' ability or willingness to switch their purchases in sufficient quantity

from suppliers in one location to suppliers in another, in response to changes in relative

prices. A relevant geographic market consists of all supply points that would have to be

included for a SSNIP to be profitable, assuming that there is no price discrimination (as

described in paragraph 4.12 above). When price discrimination is present (and buyers

and third parties are unable to arbitrage between low and high price areas), geographic

markets are defined according to the location of each targeted group of buyers.

4.26 When defining the boundaries of geographic markets, the Commission generally relies

on evidence of substitutability, including evidence from market participants and the

functional indicators described below and, when available, empirical analysis.

4.27 The views, strategies and behaviour of buyers in a given geographic area are often

reliable indicators of whether buyers would likely switch their purchases to sellers

located in other geographic areas in the event of a SSNIP. For example, the Commission

would examine what buyers have done in the past and what they are likely to do in the

future as options become available through, for instance, advances in technology.

Industry surveys and the views, strategies and behaviour of industry participants also

inform the analysis by providing information on how buyers of a relevant product in

one geographic area respond or have responded to changes in the price, packaging or

servicing of the relevant product in another geographic area. The extent to which

37

merging parties and other sellers take distant sellers into account in their business plans,

marketing strategies and other documentation can also be a useful indicator for

geographic market definition.

4.28 Various functional indicators can assist in determining whether geographic areas are

considered to be substitutes, including particular characteristics of the product,

switching costs, transportation costs, price relationships and relative price levels,

shipment patterns and foreign competition. See the table below for specific evidence

requirements.

4.29 The general approach to geographic market definition can be summed up as:

i. Identify the number, size, and locations of firms that compete with the merging

parties (the candidate market).

ii. Identify the additional competition in response to a hypothetical price increase

(which yields the competition market).

4 Types of Evidence prevalent in Geographic Market Analysis

1) Evidence that buyers have shifted or have considered shifting purchases between different geographic locations in response to relative changes in price or other competitive variables;

2) Evidence that sellers base business decisions on the prospect of buyer substitution between geographic locations in response to relative changes in price or other competitive variables;

3) The influence of downstream competition faced by buyers in their output markets; 4) The timing and costs of switching suppliers.

Alternative “Test” for Geographic Market Definition (the Elzinga-Hogarty Test)

LIFO (“Little In From Outside”) measures the importance of imports; LIFO equals 1 minus the ratio of imports to domestic consumption. As imports fall, LIFO approaches unity.

LOFI (“Little Out From Inside”), which measures exports, is defined as 1 minus the ratio of exports to domestic production. As exports fall, LOFI also approaches unity.

Elzinga-Hogarty: Rules of Thumb

A region is a geographic market if both LIFO and LOFI exceed a prescribed threshold. EH have proposed two thresholds: 75% (“weak” market) and 90% (“strong” market).

Intuition: When imports and exports are relatively small, then prices are determined by domestic competition.

38

4.30 Because the national economy is integrated with the global economy, geographic

market definition for merger review may go beyond Nigeria’s national borders.

Conversely, geographic market definition can be sub-national and even local when high

transportation costs, internal barriers to trade and business entry, and anti-competitive

business practices limit the product and geographic market. There are a variety of

reasons why buyers may be more or less willing to buy from foreign suppliers, and

these factors should be considered in defining the relevant market.

4.31 Factors than can discourage switching to a foreign produced substitute include:

(i) foreign exchange risk,

(ii) industry imposed standards,

(iii) government and industry initiatives to “buy local”,

(iv) security and border restraint measures that make “just-in-time” delivery

very difficult, and

(v) limited and undependable road, rail and port capacity and services in Nigeria

and in neighbouring countries.

The Synthesised Tripod Inquiry

4.32 For the Commission, the application of the two tests essentially involve finding

reasonably credible answers to three quite simple questions.

(vi) Which are the most obvious, for instance, 3-4 producers of close product

substitutes?

The major suppliers are usually small in number and comparatively easy to

identify. This is because merging companies, business customers and industry

experts might generally know the major producers; and because if there are

many producers, there is no need for a merger review or other competition case,

unless there is evidence of a cartel, collusion or collective/joint dominance prior

to the transaction;

39

(vii) Are there one or a few other producers of close product substitutes that would

prevent the major producers from acting like a “hypothetical monopolist” (or

cartel) in their efforts to establish and maintain a small but significant non-

transitory price increase of say 5% for a period of one year?

If in the affirmative, the Commission would add these generally smaller

producers to the relevant product market. If in the negative, the boundaries of

the relevant product market for the merger, and the product market has been

defined. The producers that are considered but not included in the relevant

product market can be considered as potential entrants from neighbouring

product markets in the entry conditions analysis (see below).

(viii) Are any of the producers in the relevant product market too far away from the

other producers and from most customers and too constrained by high

transportation costs and other geographic and distance related factors to prevent

the main producers identified in the first two questions from establishing and

maintaining a SSNIP?

If in the affirmative, the Commission would remove the producer or producers

from the relevant market and consider these more distant producers in

neighbouring geographic markets in the entry conditions analysis.11

4.33 Through answering these three questions in a reasonably credible manner, the

Commission and merging parties should identify and reach an agreement on: the

relevant market in both product and geographic space; and the “break” in the chain of

product substitutes which establishes the boundaries of the relevant market. Focusing

on customer demand responses simplifies market definition and allows both the

Commission and merging parties to move quickly on to the other steps in the merger

analysis.

Other Relevant Considerations

11 Compared with product market definition, geographic market definition tends to depend more on qualitative information and the opinions of the merging companies, business customers and other industry experts

40

4.34 Due to peculiar features, the Commission notes that expansion and entry might be more

difficult in an emerging economy such as Nigeria and therefore a comparatively small

price increase of 5% may not be sufficient to generate the short-term supplier response

needed for market definition. In addition, high information costs and asymmetries may

prevent the news of a SSNIP (a material price increase in the real world) from being

received by actual and potential producers of close product substitutes within the short

time period assumed in the SSNIP test, and for business customers and final consumers

to learn about the SSNIP and switch their purchases. For these and other reasons such

as significant price variability, high inflation, and other market turbulence and external

shocks, the Commission may in some cases consider a higher price increase (over 5%)

and a longer time frame (over 1 year) for the SSNIP test.

4.35 For example, when inflation is in double digits and there is other turbulence in the

economy, a relative/real price increase (over the general rate of inflation) of 5% over

one year may be insufficient to be seen by and thereby to trigger switching to close

product substitutes by business customers and final consumers. Factors such as double-

digit inflation may require a SSNIP test of 10-20% or more over a longer period.

Chains of Substitution

4.36 Products in a market may often be linked by means of a “chain of substitution”. In

certain cases, the existence of chains of substitution might lead to the definition of a

relevant market where products or areas at the extreme of the market are not directly

substitutable. From a practical perspective however, the concept of chains of

substitution has to be corroborated by actual evidence, for instance related to price

interdependence at the extremes of the chains of substitution, in order to lead to an

extension of the relevant market in an individual case.

Implementing the SSNIP Test- An Example

Company X and Company Y are merging. They both supply a product called “devices with a

flap”. In the market for “devices with a flap”, their combined volume market share will be

90%. However, it is not clear that this is the correct market definition. The correct market

41

definition may be “all devices”, in which case their combined market share is 45%.

Alternatively, it may be “all devices and gadgets”, in which case their combined market share

is 15%. Clearly, the correct market definition matters greatly in this case and so the

Commission implements the SSNIP test.

Table 1- Current Situation

Price

(N)

Sales

Revenue

( N )

Variable

Costs

( N )

Costs

( N )

Profits

( N )

Devices with a

flap

1000 1,000 1,000,000 700 700,000 300,000

Regular

Devices

800 1,000 800,000 600 600,000 200,000

Gadgets 700 4,000 2,800,000 600 2,400,000 400,000

Total 6,000 900,000

The current price of devices with a flap is N1,000 and the variable costs of production are

N700. Sales are 1,000. The current price of regular devices is N 800 and variable costs are

N600. Sales of regular devices are also 1,000. The current price of gadgets is N700 and the

variable costs are N600. Sales of gadgets are currently 4,000. This information is shown in

Table 1 above.

Table 1 shows that, at current prices, total sales across the three segments are 6,000 and total

profits are N900,000

Question 1: Is “devices with a flap” the correct relevant market definition?

Now suppose that a hypothetical monopolist of “devices with a flap” raised prices by 5% to

N1,050. Would this be a profitable price increase relative to the current situation? Table 2

summarises the outcome. It shows that “devices with a flap” is not a relevant market.

42

Table 2- A SSNIP Imposed on Devices with a Flap

Table 2 shows that the SSNIP imposed on devices with a flap is not profitable. Sales fall by

25% to 750 and so profits fall to N262,500. Table 2 also shows that of the lost 250 devices

with a flap sales, 100 appear to go to regular devices, 50 to gadgets, thus increasing the profits

of both these segments, and 100 sales leave the market.

Question 2: Is “all devices” the correct relevant market definition?

On the basis of Table 2, regular devices appear to be the closest substitute to devices with a

flap because more of the lost devices with a flap sales went to regular devices than to gadgets.

So the next question is to ask whether a SSNIP of 5% imposed on all devices would be

profitable. Table 3 summarises the outcome. It is clear that “all devices” is not a relevant

market.

Table 3 – A SSNIP Imposed on All Devices

Price

(N)

Sales

Revenue

( N )

Variable

Costs ( N)

Costs

( N)

Profits

( N)

Devices with a flap 1050 780 819,000 700 546,000 273,000

Regular devices 840 900 756,000 600 540,000 216,000

Gadgets 700 4,100 2,870,000 600 2,460,000 410,000

Total 5,780 899,000

Price

(N)

Sales

Revenue

( N )

Variable

Costs ( N )

Costs

( N )

Profits

( N )

Devices with a flap 1050 750 787,500 700 525,000 262,500

Standard devices 800 1,100 880,000 600 660,000 220,000

Gadgets 700 4,050 2,835,000 600 2,430,000 405,000

Total 5,900 887,500

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Sales of devices with a flap now fall to only 780, rather than 750. This indicates that some

customers who would switch to regular devices if the price of devices with a flap rose by 5%

will not switch if the price of regular devices also rises by 5%. Sales of regular devices fall by

100 to 900 and sales of gadgets increase to 4,100. The important point to note is that total

profits of all devices falls from N500,000 (i.e. N300,000 + N200,000) to N489,000 (i.e.

N273,000 + N 216,000) and so the SSNIP is not profitable for the hypothetical monopolist.

Question 3: Is “all devices and gadgets” the correct relevant market definition?

The next step is to ask whether a hypothetical monopolist of all devices and gadgets could

profitably impose a SSNIP of 5%. Table 4 summarises the outcome. It shows that such a SSNIP

would be profitable and so the correct relevant market in this case is “all devices and gadgets”.

Although sales in each of the three segments have fallen, total profits have risen from N

900,000 (i.e. N300,000 + N200,000 + N 400,000) to N1,024,900 (i.e. N280,000 + N218,400 +

N526,500). The implication is that since the correct relevant market is “all devices and

gadgets”, the current combined market share of the merging parties is 15%.

Table 4 – A SSNIP Imposed on All Devices and Gadgets

Market Participants

4.37 When engaged in a market definition exercise, the Commission will identify

participants in a relevant market to determine market shares and concentration levels.

Such participants include: i) current sellers of the relevant products in the relevant

geographic markets; and ii) sellers that would begin selling the relevant products in the

relevant geographic markets if the price were to rise by a SSNIP. In the latter case, the

Price

( N )

Sales

Revenue

( N )

Variable

Costs ( N)

Costs

( N )

Profits

( N )

Devices with a flap 1050 800 840,000 700 560,000 280,000

Standard devices 840 910 764,400 600 546,000 218,400

Gadgets 735 3,900 2,866,500 600 2,340,000 526,500

Total 5,610 1,024,900

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Commission considers a firm to be a participant in a relevant market when it does not

require significant sunk investments to enter or exit the market and would be able to

rapidly and profitably divert existing sales or capacity to begin supplying the market in

response to a SSNIP (a "supply response").

4.38 The Commission considers situations in which competitive sellers would need to incur

significant sunk investments, or would not be able to respond rapidly, in the analysis of

entry (see Part 5).

Calculating Market Share

4.39 Having defined the market, the next task will be to grasp the market structure. A very

basic summary statistic is the number of firms or participants in the market. The more

firms that are active in a market, the lower the likelihood of competition concerns. For

example, in a market with ten effective competitors, a merger would not normally be

seen as creating an issue (unless the firms in question had a particularly high market

share). By contrast, a 3-to-2 merger or 4-to-3 merger will receive attention.

4.40 The most significant summary statistic in any competition policy case is almost

certainly market share. In merger cases, the combined market share of the merging

parties and the increment in market share provide a standard starting point. For

instance, merger of firms with 40% and 30% market share to create a single entity with

70% would ordinarily be seen as raising very serious competition issues. By contrast, a

merger of firms with 5% and 9% market share creating a combined entity with 14%

market share will ordinarily be seen as not raising competition concerns.

4.41 The Commission calculates market shares for all sellers who have been identified as

participants in the relevant market. Market shares can be calculated in various ways, for

example in terms of Naira sales, unit sales, capacity or, in certain natural resource

industries, reserves, using information from a variety of sources, such as the merger

parties, competitors, customers, suppliers, trade associations and market research

reports.

4.42 When calculating market shares, the Commission uses the best indicators of sellers'

future competitive significance, considering the extent to which current market shares

45

are likely to accurately reflect future market share patterns. For example, there may be

evidence that substantial new capacity is due to come on-stream in a manufactured

product market, or new licences are about to be issued in a regulated market or some

firms are running out of reserves in a primary product market. Where such evidence

exists, the Commission adapts current market shares accordingly.

4.43 In cases in which products are undifferentiated or homogeneous (i.e., have no unique

physical characteristics or perceived attributes), and firms are all operating at full

capacity, market shares based on Naira sales, unit sales and capacity should yield

similar results. In such situations, the basis of measurement depends largely on the

availability of data. When firms producing homogeneous products have excess

capacity, market shares based on capacity may best reflect a firm's relative market

position and competitive influence in the market. Excess capacity may be less relevant

to calculating market shares when it is clear that some of a firm's unused capacity does

not have a constraining influence in the relevant market (e.g., because the capacity is

high-cost capacity or the firm is not effective in marketing its product).

4.44 When a regulated or historical incumbent firm is facing deregulation or enhanced

competition, shares based on new customer acquisitions may be a better indicator of

competitive vigour than are shares based on existing customers.

4.45 As the level of product differentiation in a relevant market increases, market share

calculated on the basis of Naira sales, unit sales and capacity increasingly differ. For

example, if most of the excess capacity in the relevant market were held by discount

sellers in a highly differentiated market, the market share of these sellers calculated on

the basis of total capacity would be greater than if they were calculated on the basis of

actual unit or Naira sales. In this case, market share based on total capacity would be a

misleading indicator of the relative market position of the discount sellers. In such

circumstances, Naira sales may be the better indicator of the size of the total market and

of the relative positions of individual firms. Because unit sales may also provide

important information about relative market positions, the Commission often requests

both dollar sales and unit sales data from the merging parties and other sellers.

46

4.46 The Commission generally includes the total output or total capacity of current sellers

located within the relevant market in the calculation of the total size of the market and

the shares of individual competitors. However, when a significant proportion of output

or capacity is committed to business outside the relevant market and is not likely to be

available to the relevant market in response to a SSNIP, the Commission generally does

not include this output or capacity in its calculations.

4.47 For firms that participate in the market through a supply response, the Commission only

includes in the market share calculations the output or capacity that would likely

become available to the relevant market without incurring significant sunk investments.

Market Concentration

4.48 Under section 94(2)(c) of the Act, the level of concentration is a factor for analysis. The

Herfindahl-Hirschman Index (HHI) measures: (i) the extent of market concentration

before and after the transaction is completed; and (ii) the change in market structure

and concentration because of the transaction. Both measures are important to deciding

whether the merger should be subjected to more detailed analysis of conduct,

competitive effects, entry and efficiencies.

4.49 By putting together information on the market participants and their market shares into

a single indicator, the HHI is a more sophisticated structural analysis. In contrast to

market share analysis, which focuses on the firm(s) under investigation, the HHI takes

into account market shares across the entire market. It is computed as the sum of

squared market shares and, therefore, places proportionately greater weight on the

market shares of the larger firms. For example, a monopoly would give a HHI of 10,000

(=1002), while a 20:30:50 market structure leads to a HHI of 3,800 (=202 + 302 + 502).

A further measure associated with the HHI is the “delta” or “increment”, which is

especially important for merger cases between competitors. The delta is the change in

the HHI following a merger. This may be calculated even without knowing the market

shares of the rest of the firms in the market, as two times the product of the market

shares of the merging firms (prior to the merger).12

12 If firms X and Y have market shares a and b, their respective contribution to the pre-merger HHI are a2 and b2. After the merger, their joint contribution is (a+b)2= a2 + b2 + 2ab. The difference in the HHI is, therefore, 2ab.

47

4.50 In a correctly defined market, the delta and HHI provide an indication of whether a

merger is likely to raise significant competitive concerns. The MRR has specified that

that competition concerns are in general unlikely with:

• a post-merger HHI below 1,000;

• a post-merger HHI between 1,000 and 2,000 but a delta below 250; and

• a post-merger HHI above 2,000 but a delta below 150.

4.51 Of course, these thresholds do not create irrebuttable presumptions. Some mergers

above the thresholds would not create competition concerns, whilst other mergers

below the thresholds would create competition concerns. It must also be recognised that

the HHI does not provide a full picture of the competitive situation. At one level, it does

not take into account important features of a market such as barriers to entry, or the

extent of spare capacity or capacity constraints, that can fundamentally affect the

competitiveness of a market for a given market structure.

4.52 As such, it is a safe harbour and does not provide a rigid screen to determine whether

or not a merger is likely to result in a substantial prevention or lessening of competition.

It allows the Commission determine whether to intensify its analysis of the competitive

impact of a merger. The HHI thresholds may also be a useful self-assessment guide for

merging parties who are considering a voluntary notification where the merger falls

below the thresholds for compulsory notification set out in the Threshold Regulations

and in minority shareholding cases.

Illustrative Example: HHI

HowDoesHHIWork?

The HHI formula is calculated by squaring the market share for each firm (usually not more than 50 firms) and then summing the squares. Here's an example: If there are four superstores in your town: Fola's, Obi's, Sani's and Ovie's. Market share is broken down as follows: Fola's: 50% Obi's: 25% Sani's: 15% Ovie's: 10% HHI = 502 + 252 + 152 + 102 = 3,450 In a perfectly competitive market, HHI approaches zero. If there are thousands of restaurants in a city, but the top 50 each have 0.1% of the market share. The HHI is 0.12 x 50 = 0.5.

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4.53 Compared with concentration ratios which add together the shares of the four (CR4) or

six (CR6) largest firms13 before and after the merger in the relevant market, the HHI

provides a more complete picture of pre-merger and post-merger market structure and

concentration through adding together the squares of the individual firms’ market

shares. This gives greater weight to the larger market shares and in particular the market

share of the dominant firm/merged entity after a merger.

4.54 To provide an obvious example, a merger of the second and third largest producers in

a pre-merger relevant market of five producers with shares of 30%, 28%, 22%, 15%

and 5% removes an important competitor but has no effect on the CR4. In contrast, the

HHI increases quite dramatically by more than 50% from 2418 to 3650 - through

capturing the establishment of a more dominant firm in the post-merger market.

4.55 The Commission recognises that HHI is criticised because market share information for

smaller suppliers (that at times are in the informal sector) is often not available.

However, this information is generally not critical because small shares have little effect

on the HHI and on the changes in market shares that result from the merger. In addition,

market definition in many emerging market economies such as Nigeria’s might indicate

high levels of market concentration with few competitors in many relevant markets.

Under these circumstances, the ability of smaller fringe suppliers to respond to a SSNIP

and discipline the pricing decisions of the major suppliers may be limited because of

capacity, financing, lower quality products that are poor substitutes for most customers,

and other constraints. Fringe suppliers therefore would not be in the relevant market but

rather would be considered in the analysis of entry and product repositioning (discussed

below).

13 This is referred to as the four-firm concentration ratio or CR4 and the six-firm concentration ratio or CR6, respectively.

49

4.56 What is evident overall is that, simple indices calculated from market shares themselves

– contingent on a market definition – can give some useful guidance and insights into

predicting the possible price effects of a merger. That is, the HHI is not just an arbitrary

structural rule, but it is a formula that has – in some circumstances – a relationship to

economic fundamentals.

4.57 Mergers that go above the HHI threshold are not necessarily anti-competitive. Under

these circumstances, the Commission examines the various factors identified under

Section 92(2) of the Act to determine whether such mergers would likely create,

maintain or enhance market power, and thereby prevent or lessen competition

substantially.

Interpreting market shares and concentration data.

4.58 There is no simple answer as to how high (or low) concentration measures need to be

to prompt (or dismiss) concerns about the impact of a merger on competition. The same

applies to the combined market share of the merged entity.

4.57 Safe harbours can be useful, for instance, since they may increase the predictability of

merger control and allows the Commission to allocate investigation resources to cases

which are more likely to result in consumer harm. Even where the merging parties’

combined market shares appear reasonably low, for example below 25 per cent, a

merger may still raise a competition issue. For example, supplier A (14 per cent share)

merges with supplier B (10 per cent), leaving only two suppliers, the merged entity AB

(24 per cent) and C (76 per cent). The post-merger HHI is 6,352 and the delta is 280.

In this example the high value of the HHI statistics may indicate the possibility that the

impact of this merger on a market that is already highly concentrated can raise some

competition issues. By contrast, competition concerns may arise even with a relatively

low post-merger HHI, for example, where the merging firms (say, with 20 per cent and

15 per cent shares) are the two largest in a fragmented market (say, all other suppliers

are 3 per cent or less) or where they have some characteristic that is not enjoyed by the

other players in the market. These examples show that market shares and HHI measures

provide only an initial indicator of potential competition concerns.

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.

PART 5- STRENGTH OF COMPETITION TEST (OTHER MERGER FACTORS)

5.1 Subsequent to the Commission’s analysis in Part 4 which is essentially quantitative and

structural in nature, this Part propounds the bases upon which the Commission shall

undertake further analysis under Section 94(2) of the Act after its analysis of market

definition, share and concentration falls short of a clearance.

5.2 The factors considered in this Part constitute aspects of what the Commission refers to

as the “strength of competition” test.14 It should be noted that although Section 94(2)(c)

of the Act identifies “levels of concentration” as a constituent factor in the test, the

Commission would as a matter of logical flow

Actual and potential import competition (Section 94(2)(a))

5.3 Actual or potential direct competition from imported goods or services can provide an

important competitive discipline on domestic firms. Where the Commission can be

satisfied that import competition — or the potential for import competition — provides

an effective constraint on domestic suppliers, it is unlikely that a merger would result

in a substantial prevention or lessening of competition.

5.4 While the current or historic levels of imports may indicate the competitive role of

imports in the relevant market, the Commission will consider the potential for imports

to expand if the merged firm attempted to exercise increased market power post-

merger.

5.5 Imports are most likely to provide an effective and direct competitive constraint in

circumstances where all of the following conditions are met:

• independent imports (that is, imports distributed by parties that are independent of

the merger parties) represent at least 10 per cent of total sales in each of the previous

three years;

14 This derives from language in Section 94(2) of the Act where the Commission is required to assess the strength of competition in the relevant market.

51

• there are no barriers to the quantity of independent imports rapidly increasing that

would prevent suppliers of the imported product from competing effectively against

the merged firm within a period of one to two years (for example, government

regulations, the likelihood and impact of anti-dumping applications on imports,

customer-switching costs or the need to establish or expand distribution networks);

• the (actual or potential) imported product is a strong substitute in all respects (that

is, quality, range, price, etc.) for the relevant product of the merged firm, taking into

account factors including the need to meet any relevant Nigerian or industry

standards, any increase in the complexity of customers’ logistical arrangements,

increased transport times and costs, and the risk of adverse currency exchange rate

fluctuations;

• the price of actual or potential landed imports, including any tariffs or other import-

specific taxes and charges, (that is, the import parity price) is close to the domestic

price of the relevant product that would prevail in the absence of the merger;

• importers are able to readily increase the supply volume of the product they import

with minimal or no increase in the price paid;

• the merged firm and other major domestic suppliers do not have a direct interest in,

are not controlled by, and do not otherwise interact with, actual or potential import

suppliers.

Barriers to Import Expansion

5.6 The ability of imports to expand (import supply elasticity) will be a key consideration

in the Commission’s competition analysis. If the supply of imports is either unable to

respond, or only able to respond slowly, to an increase in demand by Nigerian

consumers, imports are unlikely to effectively counteract any increased market power

of the merged firm. For example, where there are production capacity or supply

constraints, or where imports targeted to niche segments would not be profitable on a

wider scale given their cost structures, import competition is unlikely to be sufficient

to prevent a SPLC.

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5.7 The barriers to import expansion that the Commission considers when assessing the

supply elasticity of imports include:

• the existence of capacity constraints overseas and the resulting impact on the

potential for expansion of imports into Nigeria

• the level and impact of transport costs and logistics (particularly the impact of

transport costs as a percentage of the value of the good or service being

imported)

• the cost and delay associated with the need to establish or expand effective

distribution networks

• the cost and delay associated with any specialised facilities required by

importers to supply domestic customers

• the level and effect of tariffs, quotas and other government regulations (both in

Nigeria and the country of origin)

• the likelihood and impact of anti-dumping applications on imports

• the presence of exclusive licensing arrangements on imports

• the existence of impediments to customers choosing imports rather than the

domestic product post-merger, such as switching costs, lock-in contracts,

compatibility problems, importance of a Nigerian agent and local service and

supply, or consistency and timeliness of supply.

Qualitative Information and Evidence for import competition

5.8 The following are examples of the types of information the Commission may require

to determine the competitive constraint provided by imports:

• which products are imported into the relevant market/s

• who undertakes the importation and their relative share of the market/s

• estimates of the actual and potential level of import competition in the market/s

• historical importation figures

• details of any barriers to entry to importing, including access to distribution

facilities, transport costs and customs restrictions

• details of the price of imports as opposed to domestic production in the relevant

market/s and an explanation of any divergence in these prices

53

• the extent to which imports provide a constraint on domestic suppliers,

including the merger parties, in the relevant market/s post-merger.

Ease of Entry

5.9 The entry of new firms into a market can provide an important source of competitive

constraint on incumbents. A key component of the Commission's analysis of

competitive effects is whether timely entry by potential competitors would likely occur

on a sufficient scale and with sufficient scope to constrain a material price increase in

the relevant market. In the absence of impediments to entry, a merged firm's attempt to

exercise market power, either unilaterally or through coordinated behaviour with its

rivals, is likely to be thwarted by entry of firms that:

• are already in the relevant market and can profitably expand production or sales;

• are not in the relevant market but operate in other product or geographic markets and

can profitably switch production or sales into the relevant market; or

• can profitably begin production or sales into the relevant market de novo.

Conditions of entry

5.10 Entry is only effective in constraining the exercise of market power when it is viable.

When entry is likely, timely and sufficient in scale and scope, an attempt to increase

prices is not likely to be sustainable as buyers of the product in question are able to turn

to the new entrant as an alternative source of supply.

Timeliness

5.11 The Commission's assessment of the conditions of entry involves determining the time

that it would take for a potential entrant to become an effective competitor in response

to a material price increase that is anticipated to arise as a result of the merger. In

general, the longer it takes for potential entrants to become effective competitors, the

less likely it is that incumbent firms will be deterred from exercising market power. For

that deterrent effect to occur, entrants must react and have an impact on price in a

reasonable period of time. In the Commission's analysis, the beneficial effects of entry

on prices in this market must occur quickly enough to deter or counteract any material

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price increase owing to the merger, such that competition is not likely to be substantially

harmed.

5.12 The evaluation of whether entry will be timely necessarily varies with each specific

merger and the dynamics of the market. While the Commission’s starting point for

timely entry is entry within one to two years, the appropriate timeframe will depend on

the particular market under consideration. When determining whether potential entry is

likely to be timely the Commission considers the barriers outlined in paragraph 5.20,

as well as factors such as the frequency of transactions, the nature and duration of

contracts between buyers and sellers, lead times for production and the time required to

achieve the necessary scale.

Likelihood

5.13 When determining whether future entry is likely to occur, the Commission generally

starts by assessing firms that appear to have an entry advantage. While other potential

sources of competition may also be relevant, typically the most important sources of

potential competition are the following:

• fringe firms already in the market;

• firms that sell the relevant product in adjacent geographic areas;

• firms that produce products with machinery or technology that is similar to that used to produce the relevant product;

• firms that sell in related upstream or downstream markets;

• firms that sell through similar distribution channels; and

• firms that employ similar marketing and promotional methods.

5.14 A history of entry into and exit from a particular market provides insight into the

likelihood of entry occurring in a timely manner and on a sufficient scale to counteract

an exercise of market power by a merged firm. It is, however, not the sole determinant

of whether this would likely occur.

5.15 The Commission has to be satisfied that actual or threatened entry post-merger is not

just possible but likely in response to an attempted exercise of market power by the

merged firm. The likelihood of entry generally depends on the profitability of entering

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the market. The Commission will assess whether a new entrant could expect to make a

commercial return on its investment taking into account the price effects the additional

output may have on the market and the likely responses of the incumbent firms and

other costs/risks associated with entry. The Commission evaluates profitability at

post-entry prices, taking into account the effect that new supply would have on market

prices. These prices are often the pre-merger price levels. For instance, if a competitor

was able to enter a market only on a scale that is below the minimum viable scale, the

Commission would not consider such entry to be likely, since the entrant would be

unable to achieve the annual level of sales necessary to achieve profitability at

post-entry prices.

Sufficiency

5.16 When considering whether entry is likely to be on a scale and scope to provide an

effective competitive constraint, the Commission would examine what would be

required from potential competitors who choose to enter. The Commission will also

consider any constraints or limitations on new entrants' capacities or competitive

effectiveness. Entry by firms that seek to differentiate themselves by establishing a

niche to avoid direct competition with the merged firm may also not be sufficient to

constrain an exercise of market power.

5.17 Entry must be of sufficient scale with a sufficient range of products to provide an

effective competitive constraint. In differentiated product markets, the sufficiency of

entry will critically depend on the ability and incentive of entrants to supply a

sufficiently close substitute to that of the merged firm. Entry at the fringe of the market

is unlikely to constrain any attempted exercise of market power by incumbents if

incumbents are unlikely to lose significant sales to those fringe entrants. Therefore,

individual entry that is small-scale, localised or targeted at niche segments is unlikely

to be an effective constraint post-merger.

5.18 Sufficiency does not require in all circumstances that one new entrant alone duplicates

the scale and all the relevant activities of the merged firm. Timely entry by multiple

firms may be sufficient if the combined effect of their entry would defeat or deter the

exercise of increased market power by the merged firm.

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5.19 The Commission’s assessment of the timeliness, likelihood and sufficiency of entry

will depend on the circumstances of each particular merger under consideration.

However, the underlying test is always whether the potential for entry provides an

effective competitive constraint that would prevent a significant and sustainable

increase in the market power of market participants post-merger.

Types of barriers to entry

5.20 In assessing the potential for entry to act as a competitive constraint, the Commission

considers the costs of entry and incumbency advantages under three categories.

(i) Legal or regulatory barriers, including but not limited to:

• licensing conditions, tariffs, explicit restrictions on the number of market

participants and other government regulations;

• legally enforceable intellectual property rights;

• environmental regulations that raise the costs of entry or limit the ability for

customers to switch suppliers.

(ii) Structural or technological barriers, including but not limited to:

• the existence of sunk costs, which increase the risks of, and costs associated

with, failed entry and include factors such as product development,

advertising or promotion to establish a sufficient reputation in the market and

construction of specialised facilities — the high risk and costs associated

with failed entry may deter new entry

• substantial economies of scale, which may limit the viability of entry below

a certain minimum efficient scale.

• high customer switching costs, such as search costs, transaction costs and

market specific behaviour (including customer inertia to switching suppliers)

• mature markets or markets with declining levels of demand growth

• access to key production or supply assets, important technologies or

distribution channels

• the existence of significant network effects.

(iii) Strategic barriers that arise because of actions or threatened actions by

incumbents to deter new entry, including but not limited to:

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§ risk of retaliatory action by incumbents against new entry, such as price wars

or temporarily pricing below cost

§ creation and maintenance of excess capacity by incumbents that can be

deployed against new entry

§ creation of strategic customer switching costs through contracting, such as

exclusive long-term contracts and termination fees

§ brand proliferation by incumbents, which may crowd out the product space

leaving insufficient opportunities for new firms to recover any sunk entry

costs.

Information and Evidence to Prove Entry

5.21 The onus rests with the merging parties to demonstrate that entry will be timely, likely

and sufficient. In assessing whether entry might act as an effective competitive

constraint post-merger, the Commission will consider all relevant information

including, but not limited to the following:

§ The history of past entry such as consideration of the costs of such entry, the

length of time previous new entrants traded in the market, and the effect of

such entry on the intensity of competition in the market.

§ Evidence of planned entry by firms in adjacent or complementary markets or

by other firms outside the market.

§ Evidence indicating the level of investment (particularly any sunk costs)

required to enter the market and operate at the minimum efficient scale

necessary to achieve a reasonably competitive level of costs.

§ Evidence indicating the time period over which entry costs would have to be

recovered in order to assess whether entry would be profitable post-merger at

competitive prices.

§ Evidence of the ability of producers that are not competitors to switch

production to competing products or services and achieve success in the

market.

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§ Evidence of the extent of brand loyalty by customers.

§ Evidence of switching costs (such as product compatibility issues, product

bundling, contract termination charges) that may prevent buyers in the relevant

market/s from changing suppliers or sellers in the relevant market/s from

changing buyers, in the short to medium term

§ The length of contracts between suppliers and customers.

§ Evidence of the ability and incentive of customers to sponsor entry.

§ Evidence of any growth or decline in the market.

§ Evidence of a strategy to block or restrict entry through the acquisition of a

competitor by an incumbent.

§ Evidence of network effects that impede entry.

• the extent of brand loyalty in the relevant market/s

• the existence and nature of any long-term supply contracts in the relevant

market/s

History of Collusion

5.22 A history of collusion or coordination in the market is also relevant to the Commission's

analysis, because previous and sustained collusive or coordinated behaviour indicates

that firms have successfully overcome the hurdles to effective coordinated behaviour

in the past. The detailed discussion on conditions conducive to coordination and

collusion are discussed in paragraph 6.

Countervailing Power

5.23 In its review, the Commission would, in addition to supply-side competitive constraints,

assess whether one or more buyers are able to constrain the ability of a seller to exercise

market power. This may occur when, for example,

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• they can self-supply through vertical integration into the upstream market;

• the promise of substantial orders can induce expansion of an existing smaller

supplier and/or can sponsor entry by a potential supplier not currently in the

market;

• they can refuse to buy other products produced by the seller;

• they can refuse to purchase the seller's products in other geographic markets where

the competitive conditions are different; or

• they can impose costs on the seller (for example, by giving less favourable retail

placement to the merged entity's products).

5.24 The Commission does not presume that a buyer has the ability to exercise

countervailing power merely by virtue of its size. There must be evidence that a buyer,

regardless of size, will have the ability and incentive to constrain an exercise of market

power by the merged firm. Evidence of prior dealings between the buyer and one or

more of the merging parties that tends to demonstrate the buyer's relative bargaining

strength is of particular relevance. The Commission also considers the extent to which

the merger affects the buyer's ability and incentive to exercise countervailing power.

When a merger eliminates a supplier whose presence contributed significantly to a

buyer's historical bargaining strength, the buyer may no longer be able to exercise

countervailing power after the merger.

5.25 When price discrimination is a feature of the relevant market, it may be possible for

some but not all buyers to counter the effects of an exercise of market power. For

example, a merged firm may be able to increase prices to buyers that do not have the

option to vertically integrate their operations, while other buyers with this option may

be able to resist such a price increase. Where only a subset of buyers is able to counter

a price increase or other exercise of market power, the Commission will generally find

that countervailing power is insufficient to prevent the merged firm from exercising

market power in the relevant market.

5.26 In assessing whether countervailing power is likely to prevent a substantial lessening

of competition by constraining any attempt by the merged firm to increase market

power, the Commission considers the following factors, among others:

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• Whether the threat to bypass is credible on commercial grounds Evidence of this

will often include the size of the buyer’s purchases and the efficient scale of

production of the product. For sponsored entry to be commercially viable, the

entrant will have to operate at an efficient scale of production. If the purchases of

the sponsoring firm are insufficient to underpin such a production scale, the

Commission needs to be convinced that the entrant could readily find other sales

in the relevant market.

• Whether the buyer is likely to bypass the supplier. Evidence of this could include

plans or other documents suggesting such a strategy is commercial, as well as

instances and circumstances when the buyer or other buyers of the relevant input

have previously sponsored entry or vertically integrated. The Commission places

greater weight on evidence that such strategies form part of the firm’s business

model. Also, if the relevant input does not account for a significant proportion of

the buyer’s total input costs, sponsored entry or backward integration may be less

likely.

• The proportion of the downstream market able to wield a credible threat. For the

countervailing power to offset or limit any market power arising from a merger, it

will usually not be sufficient if only one buyer or category of customers is able to

bypass the merged firm post-merger. For example, the merged firm may be able to

increase prices charged to smaller buyers that are unable to bypass the supplier

while larger buyers with countervailing power are able to avoid the increase. A

significant proportion of customers must be shielded from the effects of market

power if countervailing power is to prevent a substantial lessening of competition

in the relevant market/s.

Information and Evidence for Countervailing Power

5.27 The following are examples of the types of information the Commission may require

to ascertain the degree of countervailing power in the relevant market/s:

• the relative strength of bargaining power possessed by customers of the products

in the relevant market/s

• the extent to which it is possible for customers to bypass the merger parties by

importing or producing the product themselves, vertically integrating, or using an

alternative supplier.

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Dynamic characteristics of the market15

5.28 Dynamic changes may result from a range of factors including market growth,

innovation, product differentiation and technological changes. The analysis of the

effects of dynamic changes in the market is closely linked with analysis of the other

merger factors discussed in this chapter. The changes in the market will be considered

from two perspectives:

• the extent to which the dynamic features of the market affect the likely competitive

impact of the merger

• whether the merger itself impacts on the dynamic features of the market.

5.29 Whether a market is growing or declining can have significant implications for the

competitiveness of the market in the future. Markets that are growing rapidly may offer

both greater scope for new entry and the erosion of market shares over time.

5.30 Similarly, markets that are characterised by rapid product innovation may be unstable

so that any increased market power gained through a merger is transitory. In general, a

merger is less likely to substantially lessen competition in a market that is rapidly

evolving.

5.31 When considering how a merger will influence future competition in a dynamic market,

the Commission places more weight on robust evidence about likely future

developments in the relevant market. The Commission will give significantly less

weight to predictions about the future state of competition that are speculative or have

little chance of developing for some considerable time in the future.

5.32 The MRR stipulates that Commission will consider changes in the market from two

perspectives:

(a) the extent to which the dynamic features of the market affect the likely

competitive impact of the merger

(b) whether the merger itself impacts on the dynamic features of the market.16

15 Refers to the merger factor in section 94(2)(e) of the Act. 16 Regulation 49 of the Merger Review Regulations 2020

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Vertical Integration in the market17

5.33 It is recognised that some horizontal mergers can be affected by vertical integration or

vertical relationships in the market — for example, horizontal competition issues may

be exacerbated by vertical aspects of a merger and vice versa. Where a merger involves

both horizontal and vertical competition issues, the Commission will assess the merger

based on the combined horizontal and vertical impact on competition.

5.34 The nature and extent of vertical relationships between firms in separate areas of

activity along a vertical supply chain can affect the competitive implications of

consolidation in any one of those areas. For example, a horizontal merger can increase

the likelihood of coordination in cases where downstream integration increases the

visibility of pricing. Generally, horizontal mergers involving a vertically integrated firm

are unlikely to lessen competition provided effective competition remains at all levels

of the vertical supply chain post-merger.

Information and Evidence to Prove Vertical integration

5.35 The following are examples of the types of information the Commission may require

to ascertain whether vertical integration is likely to be relevant to the competition

assessment:

• whether the merger will result in vertical integration between firms involved at

different functional levels of the relevant market/s

• whether the merger is likely to increase the risk of limiting the supply of inputs or

access to distribution, such that downstream or upstream rivals face higher costs

post-merger or risks of full or partial foreclosure of key inputs or distribution

channels

• the extent of existing vertical integration, noting in particular where either merger

party currently operates as a customer or supplier to competitors in the relevant

market/s.

17 Section 94(2)(f) of the Act

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Failing Firm18

5.36 The impact that a firm's exit can have in terms of matters other than competition is

generally beyond the scope of the assessment contemplated by section 94(2)(g) of the

Act. Probable business failure does not provide a defence for a merger that is likely to

prevent or lessen competition substantially. Rather, the loss of the actual or future

competitive influence of a failing firm is not attributed to the merger if imminent failure

is probable and, in the absence of a merger, the assets of the firm are likely to exit the

relevant market. Merging parties intending to invoke the failing firm rationale are

encouraged to make their submissions in this regard as early as possible.

5.37 A firm is considered to be failing if:

• it is insolvent or is likely to become insolvent;

• it has initiated or is likely to initiate voluntary bankruptcy proceedings; or

• it has been, or is likely to be, petitioned into bankruptcy or receivership.

5.38 In assessing the extent to which a firm is likely to fail, the Commission typically seeks

the following information:

• the most recent, audited, financial statements, including notes and qualifications

in the auditor's report;

• projected cash flows;

• whether any of the firm's loans have been called, or further loans/line of credit

advances at viable rates have been denied and are unobtainable elsewhere;

• whether suppliers have curtailed or eliminated trade credit;

• whether there have been persistent operating losses or a serious decline in net

worth or in the firm's assets;

• whether such losses have been accompanied by an erosion of the firm's relative

position in the market;

• the extent to which the firm engages in "off-balance-sheet" financing (such as

leasing);

18 Section 94(2)(g) of the Act

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• whether the value of publicly-traded debt of the firm has significantly dropped;

• whether the firm is unlikely to be able to successfully reorganise pursuant to

Nigerian or foreign bankruptcy legislation, or through a voluntary arrangement

with its creditors.

5.39 These considerations are equally applicable to failure-related claims concerning a

division or a wholly-owned subsidiary of a larger enterprise. However, in assessing

submissions relating to the failure of a division or subsidiary, particular attention is paid

to transfer pricing within the larger enterprise, intra-corporate cost allocations,

management fees, royalty fees, and other matters that may be relevant in this context.

The value of such payments or charges is generally assessed in relation to the value of

equivalent arm's-length transactions.

5.40 Matters addressed in financial statements are ordinarily considered to be objectively

verified when these statements have been audited or prepared by a person who is

independent of the firm that is alleging failure. The Commission's assessment of

financial information includes a review of historic, current and projected income

statements and balance sheets. The reasonableness of the assumptions underlying

financial projections is also reviewed in light of historic results, current business

conditions and the performance of other businesses in the industry.

Removal of an Effective and Vigorous Competitor

5.41 A firm that is an effective and vigorous competitor19 often plays an important role in

pressuring other firms to compete more intensely with respect to existing products or

in the development of new products. A firm does not have to be among the larger

competitors in a market in order to be an effective and vigorous competitor. Small firms

can exercise an influence on competition that is disproportionate to their size. Mergers

involving a vigorous and effective competitor are more likely to result in a significant

and sustainable increase in the unilateral market power of the merged firm or increase

the ability and incentive of a small number of firms to engage in coordinated conduct.

Vigorous and effective competitors may drive significant aspects of competition, such

as pricing, innovation or product development, even though their own market share may

be modest. These firms tend to be less predictable in their behaviour and deliver benefits

19 Mavericks are one type of effective and vigorous competitor

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to consumers beyond their own immediate supply, by forcing other market participants

to deliver better and cheaper products. They also tend to undermine attempts to

coordinate the exercise of market power.

5.42 A merger that removes a vigorous and effective competitor may therefore remove one

of the most effective competitive constraints on market participants and thereby result

in a substantial lessening of competition. This often depends on (i) the significance of

the effective competitor in the market and (ii) the extent to which the merged entity will

compete less vigorously than the effective firm prior to the merger. 20

5.43 While the removal of a vigorous and effective competitor through a merger is likely to

prevent or lessen competition to some degree, it may not, in itself, provide a sufficient

basis for a decision to challenge the merger. Additionally, when a firm removed through

a merger is not a vigorous or effective competitor (e.g., owing to financial distress, or

declining technologies or markets), this fact is relevant to, but not determinative of, a

decision not to challenge a merger.

5.44 Other things being equal, a horizontal merger that results in the establishment or

strengthening of a maverick producer is less likely to have adverse unilateral or

coordinated effects. One implication for emerging economies such as Nigeria is that

larger and more diversified companies, conglomerates and business groups with good

access to capital, technology and inputs, and substantial diversification experience

might be well positioned to: (i) enter or expand in relevant markets, (ii) become an

effective and vigorous competitor after internal expansion or a merger is completed,

and thereby (iii) reduce the risk and duration of a material price increase and other

unilateral or coordinated effects.

5.45 Mavericks can also have pro-competitive effects throughout a supply chain. For

example, a disruptive maverick input supplier or input purchaser/final product customer

whose disruptive conduct and e.g. refusal to follow and participate in a tacit collusion

arrangement at the input or business customer stage of the supply chain can make

20 (Maverick behaviour is also relevant in the context of coordinated effects as discussed in paragraph 6.39, and also in the context of non-horizontal mergers as discussed in paragraph 6.47.)

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coordinated and other forms of anticompetitive conduct more difficult in the acquiring

firm’s or dominant firm’s stage of production in the supply chain.

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PART 6: ANTI-COMPETITIVE EFFECTS AND THEORIES OF HARM

Types of Merger

6.1 These Guidelines discuss three types of merger — in each, the merger may involve

firms that are either actual or potential competitors:

iv. horizontal mergers — involving actual or potential suppliers of substitutable

goods or services;

v. vertical mergers — involving firms operating or potentially operating at

different functional levels of the same vertical supply chain; and

vi. conglomerate mergers — involving firms that interact or potentially interact

across several separate markets and supply goods or services that are in some

way related to each other, for example, products that are complementary in

either demand or supply.

6.2 Each type of merger has the potential to affect competition in a different way and will

therefore be analysed differently. While some competition issues and theories of

competitive harm are presented separately in these guidelines, the Commission will

adopt an approach tailored to the particular nature of the merger.

6.3 It is also important to note that although horizontal, vertical and conglomerate mergers

can all potentially give rise to competition concerns, it is recognised that vertical and

conglomerate mergers are generally less likely than horizontal mergers to raise

competition concerns.

6.4 This Part elaborates on the effects analysis- the probable harm that would be occasioned

post-merger.

Theory of Harm and Effects

6.5 Not all mergers give rise to competition concerns though in some cases the different

types of mergers may lead to specific harmful effects. The Commission will generally

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consider the basic theories of harm. Broadly, there are three main reasons why mergers

may lead to an SPLC:

i. Unilateral effects- these may arise in horizontal mergers where the merger

involves two competing firms and removes the rivalry between them, allowing

the merged firm profitably to raise prices (see paragraphs 6.6 to 6.38).

ii. Coordinated effects- these may arise in both horizontal and non-horizontal

mergers where the merger enables or increases the ability for several firms

within the market (including the merged firm) jointly to increase price because

it creates or strengthens the conditions under which they can coordinate (see

paragraphs 6.39 to 6.46).

iii. Vertical or conglomerate effects- these may arise principally in non-horizontal

mergers where the merger creates or strengthens the ability of the merged firm

to use its market power in at least one of the markets, thus reducing rivalry (see

paragraphs 6.47 to 6.66). However, these effects can, in some circumstances,

also arise in horizontal mergers.

Unilateral Effects

6.6 One of the main ways in which mergers can lessen competition is through unilateral

effects. Mergers have unilateral effects when they remove or weaken competitive

constraints in such a way that the merged firm’s unilateral market power is increased.

That is, as a result of the merger the merged firm finds it profitable to raise prices,

reduce output or otherwise exercise market power it has gained, and can do so, even

given the expected response of other market participants to the resulting change in

market conditions.21

6.7 The basic theory of unilateral effects is summed up below:

(a) the merger increases the incentive for one or both of the merging parties to

increase price(s);

21 This may be contrasted to coordinated effects arising from a merger where it may be profitable for the merged firm to raise prices, reduce output or otherwise exercise market power because it considers that the responses of its rivals will be directly influenced by its own actions. This may manifest as either tacit or explicit collusion.

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(b) if the merged entity increases price(s) then non-merging parties increase price as

well (through what is called a “second round” effect) and the higher price

equilibrium can be sustained in the absence of explicit or tacit collusion because

the merger weakens the competitive constraints faced by each merging party; and

(c) substantial reductions in marginal cost can outweigh the incentive for the merged

firm to increase prices, inducing the merged entity to lower price (in which case

non-merging firms lower their prices too).

6.8 Unilateral effects can occur in various market environments, defined by the primary

characteristics that distinguish the firms within those markets and determine the nature

of their competition. Three types of market environment are described below.

Firms in differentiated product industries

6.9 In markets in which products are differentiated, a merger may create, enhance or

maintain the ability of the merged firm to exercise market power unilaterally when the

product offerings of the merging parties are close substitutes for one another. In such

circumstances, the Commission assesses how the merger may change the pricing

incentives of the individual firms.

6.10 Any firm considering increasing the prices for its products faces a trade-off between

higher profits on the sales that it continues to make following the price increase and the

profits that it loses on sales that it no longer makes following the price increase, as

buyers switch to other firms and/or other products. Any sales that were previously lost

to the firm's merging partner will be captured by the merged firm ("diverted sales").

Thus, the incentives to raise prices after the merger are greater the more closely the

products of the merging firms compete with each other, and the larger the profit margins

on these diverted sales.

6.11 The closeness of competition between the merging firms' products may be measured by

the diversion ratio between them. 22 The value of the diverted sales from one merging

firm depends on the volume of diverted sales and the profit margin on the diverted sales.

22 See the Text Box below

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The greater the value of the diverted sales, the greater the incentive the merged firm has

to raise prices. The incentive to raise prices following the merger will typically be

greater when-

(a) the products of the merging firms are close substitutes for a significant number of

buyers,

(b) the merger removes a vigorous and effective competitor from the market, or when

buyers are not very sensitive to price increases.

6.12 These are not the only circumstances, however, when the Commission may be

concerned with potential unilateral effects post-merger. Even when the merging firms

are found to have an incentive to increase price after the merger, the likelihood of the

merger preventing or lessening competition substantially also depends on the responses

of buyers and rival firms.

6.13 In addition to considering the value of sales currently diverted to rivals, the Commission

evaluates the likely competitive responses of rivals, including whether rivals in the

market are likely to expand production, reposition their products or extend their product

line to discipline unilateral market power that would otherwise occur as a result of the

merge. The Commission also considers existing sellers that may only occupy a

particular niche within the relevant market and whether they provide an alternative for

a sufficient number of buyers. In addition, the likelihood and likely impact of entry is

considered.

6.14 When assessing the extent of competition between the products of the merging firms,

the Commission examines, among other possible factors, past buyer-switching

behaviour in response to changes in relative prices, information based on buyer

preference surveys, win-loss records, and estimates of own-price and cross-price

elasticities.

Firms in homogeneous product industries

6.15 A post-merger price increase may be profitable if the merger were to remove a seller to

whom buyers would otherwise turn in response to a price increase. In markets in which

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products are relatively undifferentiated (that is, they are homogeneous), such a price

increase is more likely to be profitable in the following circumstances:

• the greater the share of the relevant market the merged firm accounts for;

• the lower the margin on the output that the merged firm withholds from the market

to raise price;

• the less sensitive buyers are to price increases; and

• the smaller the response of other sellers offering close substitutes.

6.20 The response of other sellers will be smaller when they have insufficient capacity to

increase sales to replace the output withheld by the merged firm post-merger, or

substantial amounts of capacity are committed to other buyers under long-term

contracts, and capacity cannot be expanded quickly and at relatively low cost.

Therefore, the Commission would examine, among other factors, whether capacity

constraints limit the effectiveness of remaining sellers by impeding their ability to make

their products available in sufficient quantities to counter an exercise of market power

by the merged firm.

Bidding and bargaining markets

6.21 In some markets, sellers may interact with buyers through bidding or bargaining for the

right to supply. Buyers may negotiate with multiple sellers as a means of using one

seller to obtain a better price from another seller. Such interactions may take the form

of a pure auction or involve repeated rounds of negotiation with a select group of sellers.

A merger between two sellers will prevent buyers from playing these two sellers off

against each other to obtain a better price.

6.22 The extent to which this loss of competition will affect the price paid by the buyer

depends on how close the merging firms are to each other relative to other bidders and

potential suppliers in meeting the buyer's requirements. When there are many bidders

or potential suppliers that are equally or similarly situated as the merging parties, a

merger involving two sellers is unlikely to prevent or lessen competition substantially.

Other Relevant Considerations

6.23 In the cases of both homogeneous and differentiated product markets, if the main

competitive constraints pre-merger was the other party to a merger, in removing this

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constraint, may make it profitable for the merged entity to raise prices unilaterally. The

removal from the market of a competitive force can also result if an enterprise merges

either with a potential (rather than actual) competitor, for example, a recent entrant or

an enterprise with a modest market share but expected to grow into a significant

competitive force.

6.24 In an extreme case, no actual or potential rivals remain after the merger (a merger to

monopoly situation). In other cases, the main rival has been eliminated and a merger

results in a market characterised by a single enterprise with significant market power

and numerous smaller competitors able to supply only a small proportion of total market

demand (that is there is no strong “competitive fringe” in the market23).

6.25 In other situations where unilateral effects occur, other market participants may respond

in a pro-competitive way and (at least partially) attempt to offset the merged firm’s

behaviour. Alternatively, it may be more profitable for other market participants to

simply support the merged firm’s conduct — for example, if a merged firm exercises

unilateral market power by raising the price of its products, other firms supplying

substitutes may respond by also raising their prices, thereby exacerbating the

competitive impact of the unilateral exercise of market power. As this example

illustrates, a unilateral exercise of market power may make it profitable for both the

merged firm and its competitors to raise prices.

6.26 In determining whether unilateral effects arise and whether they are likely to result in a

SPLC, the Commission considers all of the merger factors contained in s. 94(3) of the

Act and any other relevant factors described in Part 4. In particular, it considers whether

the broader actual and potential competitive constraints — such as new entrants,

imports or countervailing power — will limit any increase in the unilateral market

power of each remaining market participant. These factors are discussed in more detail

in Part 5.

23 The term “competitive fringe” is often used to describe a group of relatively small enterprises in a market containing larger enterprises.

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6.27 From the point of view of merger analysis, the Commission considers the likely post-

merger environment and assesses the strength of existing competition, barriers to

expansion and product repositioning, switching costs, dynamic effects.

Existing Competition

6.28 Closeness of competition: Are the firms each other’s closest competitors, while other

firms in the market are relatively distant competitors?

Barriers to expansion or product repositioning:

6.29 Are the non-merging firms constrained such that they could not (or would not have the

incentive to) increase output in response to attempts by the merged party to increase

prices, for instance, due to capacity constraints (or dependency on the inputs and

outputs from the merging parties)?

6.30 Can rivals re-position their (or introduce new) products (to become close competitors)

without substantial sunk costs and in a timely manner?

Switching costs:

6.31 Would consumers face substantial difficulties or costs switching to alternative suppliers

if the merged party attempted to increase price?

Dynamic effects:

6.32 Does the merger eliminate an effective competitive force that:

(a) would have grown rapidly (e.g. due to its lower cost base); or

(b) had innovations in the pipeline that would have been brought to market?

6.33 Even if the merger involves one party whose market share is relatively low, could that

low market share understate the true competitive constraint exerted on the other party

due to such “dynamic” effects being likely? In particular, an important issue is whether

one of these firms is a so-called “maverick” that plays (or is likely soon to play) an

unusually pro-competitive role in the industry, acting to constrain the pricing of all

firms to a greater extent than indicated by its market share.

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6.34 Equally, even if the merger involves firms with large shares, are there smaller firms

which (soon will) offer a constraint that is substantially greater than their current market

share might suggest? For example, is there another firm in the market that could be

described as a maverick that, despite its small size, is able to effectively constrain the

pricing of much larger firms?

Empirical tests for Unilateral Effects 6.35 There are many empirical tests available. The Commission might consider the balance

of evidence from many empirical tests. The tests considered are:

• Diversion ratios:

Diversion ratios are important in assessing closeness of competition between

merging parties. Diversion ratios measure the proportion of sales captured by

different substitute products when the price of a product is increased. For

example, suppose 100 fewer units of product X are sold when X’s price

increases by a small amount (e.g, 5%), and 30 and 70 of these units are captured

by products Y and Z, respectively. Here, the diversion ratio from X to Y is 30%,

and the diversion ratio from X to Z is 70%. This indicates that product Z is the

closest substitute for product X.

Diversion ratios can also be combined with margin data to perform price

pressure tests (UPP, GUPPI and IPR).

• Survey evidence:

Actual evidence on switching behaviour, particularly in response to previous

changes in price, could be important evidence on closeness of competition.

Survey design must elicit information on actual behaviour than how

respondents state they might act in a hypothetical situation put forward by the

surveyor.

• Residual spend analysis:

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Data on residual spend by consumers can indicate the extent to which they

multi-source, and can be used to imply their second preferences. These can then

be compared to market share figures to see how well the latter indicate the

closeness of competition between firms.

• “Impact analysis”:

An analysis of how purchasers respond to temporary outages in production,

temporary promotions, new entry and exit can be highly informative (provided

that we can control for other factors that may also affect the variables of

interest).

Minority Shareholdings

6.38 One firm acquiring a minority shareholding (even if not a controlling stake) in another

firm in the same market can give rise to unilateral effects similar to that of a standard

merger.

Coordinated effects

6.39 In addition to unilateral effects, mergers can lessen competition through coordinated

effects. Mergers have coordinated effects when they assist firms in the market in

implicitly or explicitly coordinating their pricing, output or related commercial

decisions. A merger may do so simply by reducing the number of firms among which

to coordinate, by removing or weakening competitive constraints or by altering certain

market conditions that make coordination more likely. Coordinated effects may occur

in addition to unilateral effects so that the merged firm is able to achieve even higher

prices than it would on its own. In some cases, coordinated effects, either alone or in

conjunction with unilateral effects, may amount to a substantial lessening of

competition.

6.40 Following the structural changes a merger brings about for a market, competitors may

find it more beneficial than previously to come to an implicit understanding among

themselves to refrain from competing. The Act penalises collusion between enterprises,

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for example to fix prices, share out markets or allocate customers. During a merger

investigation, the Commission will consider whether the merger will result in such a

high market concentration that unlawful coordination becomes likely. However, any

type of merger may in more subtle ways enable or increase the ability of several

enterprises within a relevant market (including the merged enterprise) to coordinate

their competitive behaviour.

Coordinated conduct

6.41 Mergers have coordinated effects when they alter the nature of interdependence

between rivals such that coordinated conduct is more likely, more complete or more

sustainable. Interdependence arises when a market is characterised by a small number

of firms (an oligopoly or a duopoly), with each firm anticipating the response of the

other firms and devising their commercial strategies accordingly. If the oligopolistic

structure of a market persists over time — for instance, because barriers to entry and

expansion shield incumbents from new competitors — the repeated nature of the

competitive interaction can result in a range of coordinated conduct, from muted

competition through to tacit or explicit agreement between firms not to compete.

Although firms may have the ability to engage in effective competition, they may not

have the incentive if they recognise that any short-term benefits from competing will

likely be eroded by lost sales once other firms respond. Coordinated conduct can in

some cases involve contravention of other provisions of the Act.

Factors Conducive to Coordination

6.42 Among the issues to be considered in assessing market conditions conducive to

coordination are:

(a) Market concentration- Where there are fewer undertakings in a market, it is easier

and more convenient to coordinate behavior rather than where the undertakings

within the market are disparate and large in number.

(b) The stability of the market- coordination will be facilitated by stable demand and

supply conditions compared to more volatile market conditions (for example, with

respect to prices, innovation or ease of entry and exit in the market).

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(c) Frequency and regularity of business – a regular pattern of transactions (e.g., in

terms of timing and size) makes it easier to plan, monitor and detect deviations from

the terms of coordination.

(d) The degree of symmetry between enterprises in the market.24

(e) Homogeneity of products or services – prices for close or perfect substitutes will be

easier to coordinate than prices for imperfect substitutes.

(f) Homogeneity of undertakings – undertakings with similar characteristics (e.g.,

market shares, cost structures, levels of vertical integration) will be more likely to

have similar, and hence sustainable, incentives to coordinate than dissimilar firms.

(g) The availability of information- transparent focal points for coordination lends itself

readily where there is unambiguous information upon which to plan, monitor and

detect deviations from the terms of coordination (e.g., prices, output, capacity,

customers served, territories served, discounts, new product introductions, etc.).

(h) Cross-shareholdings and/or other linkages which may facilitate coordination – the

exchange of information will be easier for connected firms than for unconnected

firms.

6.43 The existence or non-existence of market conditions, such as have been identified

above, may indicate scope (or lack of scope) for coordinated behaviour. The

Commission’s analysis will include an assessment of conditions conducive to

coordination, including those listed above, and the impact of the merger on those

24 A market with symmetric undertakings is one that have identical products and cost conditions, then the degree to which price exceeds marginal cost is inversely related to the number of firms. Thus, as the number of firms increases, the equilibrium approaches what it would be under perfect competition. More generally, it can be shown that for the industry the degree to which price exceeds marginal cost is directly proportional to the Herfindahl-Hirschman Index of concentration. As concentration rises, industry performance deviates more from the norm of perfect competition. Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

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conditions. Neither the existence nor the nonexistence of one or more of the above

conditions is conclusive as an indicator of coordinated effects and consumer harm.

Incentives for Coordination

6.44 The incentive for participating firms (i.e., participating in coordinated behaviour) to

compete less intensively than in a competitive market is the prospect of increased

profits as implied by the terms of coordination. The larger the increase in profit, the

greater will be the incentive for coordination.

6.45 In addition to the incentive to participate, however, each participating firm might also

be drawn to deviate from the terms of coordination, i.e., to “cheat”, at the expense of

other participating firms. For example, if Competitor A deviates and other competitors

act in accordance with the terms of coordination, then Competitor A will benefit from

increased sales revenue.25 In contrast, as a consequence of Competitor A’s cheating,

those competitors honouring the terms of coordination will lose sales revenue.

6.46 As such, the strength of the incentive to participate in coordination depends not only on

the prospect of increased profits, but also on the practicability of detection and sanction

by the other participating firms of deviations from the terms of coordination. The

Commission will consider all available evidence, including internal documents, to

determine the extent to which a merger increases the incentives of competitors to

engage in coordinated behaviour. In the absence of credible contrary evidence, previous

overt or tacit coordinated behaviour will be considered an indicator of possible or likely

coordination post-merger.

Non-horizontal (vertical and conglomerate) Effects

6.47 In the majority of cases, non-horizontal mergers will raise no competition concerns.

However, where insufficient competitive constraints remain in the relevant market post-

merger, some non-horizontal mergers will raise competition concerns when the merged

25 Game theory indicates that coordination among firms might be inherently unstable. Each individual member has an incentive to cheat in order to make higher profits in the short run. Cheating may lead to the collapse of a cartel. With the collapse, firms would revert to competing, which would lead to decreased profits.

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firm is able to increase its unilateral market power. One way in which this can occur is

through the merged firm ‘foreclosing’ rivals, but non-horizontal mergers can also

increase unilateral market power in other ways. In some cases, a non-horizontal

transaction, either alone or in conjunction with a horizontal transaction, may amount to

a substantial lessening of competition in a market.

Foreclosure

6.48 Recognising that not all forms of foreclosure are anti-competitive, the Commission will

only be concerned with non-horizontal mergers where the merged firm has the ability

and incentive to use its position in one market to anti-competitively foreclose rivals in

another market in a way that lessens competition.

6.49 In determining whether foreclosure is likely to increase the unilateral market power of

the merged firm, the Commission will consider the following three issues:

• the merged firm’s ability to foreclose

• any incentive the merged firm may have to foreclose

• the likely effect of any such foreclosure.

6.50 The particular anti-competitive foreclosure strategies that a vertically integrated merged

firm might adopt will depend on the circumstances of each case, but some examples

include:

• charging a higher price for an important input into the production processes of

downstream (non-integrated) rivals

• limiting,31 or denying access by, downstream (non-integrated) rivals to important

inputs (thereby forcing them, for example, to use more expensive or inferior quality

alternatives)

• limiting, or denying access by, upstream (non-integrated) rivals to a sufficient

customer base

• raising the cost of access by upstream (non-integrated) rivals to a sufficient

customer base.

6.51 For conglomerate mergers, competitive concerns related to foreclosure arise where they

enable the merged firm to alter its operations or product offerings in a way that can

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limit or raise the cost of rival firms’ access to a sufficient customer base and in some

circumstances deny rival firms access to customers altogether. Specific examples of

where merged firm’s rivals may be foreclosed if the merged firm chooses to bundle or

tie complementary products, are when:

• no product can be purchased or used separately

• at least one product cannot be purchased or used separately, or

• customers receive additional benefits when they purchase or use the merged firm’s

products together (for example, due to discounts, rebates or design features).

i. Enabling Price Discrimination

6.52 Firms with control over a range of products sold to the same customers may also be

able to use this range of products to price discriminate (charging different types of

customer different prices). There is no inherent economic inefficiency here – indeed if

output is increased it is likely to benefit customers on average – but it may in some

cases result in a transfer of value from consumers to producers. Therefore, effects of

this type, while not of concern for the economy as a whole, may be of concern to

Commission.

ii. Exclusionary Motives

6.53 Of course, vertical and conglomerate mergers may also be driven by the desire to use

market power in one market to drive out competition in another. There are several

mechanisms by which these exclusionary effects can occur.

6.54 First, the merger could lead to input foreclosure, by which the upstream division of the

merged firm refuses to sell, degrades quality, or raises the input prices charged to

targeted (or all) rivals of the downstream division of merged firm, and thereby gives

the downstream division the power to raise its price. The upstream division alternatively

might threaten to deny access or degrade quality in order to increase its bargaining

power to negotiate a higher input price. Second, a merger could lead to customer

foreclosure, by which the downstream division of the merged firm reduces or stops

purchasing inputs from the other upstream firms, which then can disadvantage those

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firms and provide the upstream division of the merged firm with the power to raise its

price.

6.55 Alternatively, the downstream division of the merged firm might threaten to refuse to

purchase in order to induce the independent input suppliers to raise the prices that they

charge to its downstream rivals. These two types of foreclosure can function

independently or can reinforce one another in combination. For example, if customer

foreclosure leads to downstream rivals paying higher input prices, that effect will cause

input foreclosure. Other markets also might be affected. For example, if downstream

rivals are disadvantaged by input foreclosure and there are economies of scope with

another product, the downstream division of the merged firm may gain the power to

raise prices in that other product market, even though manufacturing that other product

that does not use the input sold by the upstream division. This concern may be

particularly relevant for high-technology markets.

6.56 Third, the merger could provide the downstream division of the merged firm with

access to sensitive competitive information of its competitors from the upstream

division of the merged firm, which the downstream firm can use to more rapidly

respond to or even preempt competitive moves by these competitors, and deter such

competitive moves as result.

Information required for Foreclosure Analysis

6.57 In analysing both input and customer foreclosure concerns, the following general

market information would be relevant:

• Pre-merger market structure and competition in input and output markets.

• Impact of the merger on market structure and incentives in the input and output

markets.

• Ability and incentive of non-merging input suppliers and downstream competitors

to continue to compete, if foreclosed by merging firm.

• Behavior and market impact of other integrated firms.

• Existence, structure (including any exclusionary provisions), and competitive

effects of other vertical contracts by the parties or other firms in the markets.

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6.58 Beyond the general analysis of the markets, the following information also could aid in

the evaluation of the potential upstream and downstream effects of input foreclosure:

• Identification of downstream rivals likely targeted for a foreclosure strategy of

either raising price, refusing to sell, or degrading quality.

• Ability of the targeted downstream rivals to substitute to other equally cost-

effective input suppliers and the capacity and incentives of those input suppliers,

including any impact of any reduced input purchases by the downstream division

of the merged firm.

6.59 Determination of whether the other input suppliers would have the unilateral incentives

to raise their prices, or the incentive and ability to raise prices in coordination with one

another, if the upstream division of the merged firm were to engage in an input

foreclosure strategy.

6.60 The resulting extent to which downstream rivals’ costs would be raised (or quality

decreased) if the upstream division of the merged firm refuses to sell its input or raises

its input price to the targeted downstream rivals.

Evaluative Factors

6.61 These are the factors the commission will analyse:

• Evaluation of whether there are downstream firms (including vertically

integrated competitors) that have alternative access to inputs from other

upstream firms or upstream entry so that they will not be disadvantaged by (or

targeted for) any foreclosure that occurs.

• Evaluation of the residual competitive constraints provided by these non-

targeted downstream competitors.

• Evaluation of competitive constraints provided by other products that do not use

the inputs supplied by the upstream division of the merged firm and its

competitors.

• Information relevant to estimating the rate at which variable cost increases of

the upstream and downstream are passed through as higher prices.

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• Information from natural experiments relevant to estimating diversion ratios

resulting from foreclosure.

• Input pricing and sales conduct of other integrated firms in the market and

evaluation of any impact on downstream prices.

• Evaluation of the market impacts, if any, of other vertical contracts that involve

exclusivity or favouritism.

• Evaluation of whether the other input suppliers would have the unilateral

incentives to raise their prices, or the incentive and ability to raise prices in

coordination with one another, if the upstream division of the merged firm were

to engage in an input foreclosure strategy.

• The resulting extent to which downstream rivals’ costs would be raised (or

quality decreased) if the upstream division of the merged firm refuses to sell its

input or raises its input price to the targeted downstream rivals.

6.62 Beyond the general analysis of the market structure of the downstream and upstream

markets, certain information relevant to evaluating these unilateral pricing concerns

would include the following:

• If the downstream firm raised price and lost a certain percentage of its sales, the

fraction of those sales that would be diverted to other firms which would

purchase inputs from the upstream division of the merged firm in order to satisfy

their incremental demand.

• The likely increased input purchases from the diverted sales obtained by the

upstream division.

• The incremental profit margin of the upstream division of the merged firm and

the resulting incremental profits earned by the upstream division of the merged

firm on those increased input purchases from the diverted sales.

• The incremental profit margin of the downstream division of the merged firm.

• The potential for repositioning by other downstream firms.

• The potential for rapid entry and longer-term entry into the downstream market.

• Evaluation of the pricing behavior of other integrated firms.

Examples of Problematic Non-Horizontal Mergers

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6.63 Examples of situations in which products are related such that the Commission may

assess whether a merger gives rise to an SPLC on the basis of non-horizontal effects

include where there is a:

• vertical merger between an upstream supplier and a downstream customer which

purchases the supplier’s goods, either as an input into its own production or for

resale;

• diagonal merger between an upstream supplier and a downstream competitor of the

customers that purchase the supplier’s goods; and

• conglomerate merger of two suppliers of goods which do not lie within the same

market, but which are nevertheless related in some way; for example because they

are complements (so that a fall in the price of one good increases the customer’s

demand for another); or because there are economies of scale in purchasing them

(so that customers buy them together).

6.64 Similarly, conglomerate mergers between makers of complementary goods may give

rise to concerns of foreclosure, which may have the effect of preventing competition.

Despite the differences in the variety of circumstances in cases, the Commission will

typically frame its analysis of non-horizontal mergers by reference to the following

three questions:

(a) Ability: Would the merged firm have the ability to harm rivals, for example

through raising prices or refusing to supply them?

(b) Incentive: Would it find it profitable to do so?

(c) Effect: Would the effect of any action by the merged firm be sufficient to

reduce competition in the affected market to the extent that, in the context of the

market in question, it gives rise to an SPLC?

6.65 In practice, the analysis of these questions may overlap and many of the factors may

affect more than one question. Therefore, the Commission’s analysis of ability,

incentive and effect may not be in distinct chronological stages but rather as

overlapping analyses. So as to reach an SPLC finding, all three questions must be

answered in the affirmative.

6.66 Overall, the Commission’s approach to non-horizontal mergers are outlined below:

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(i) Vertical and conglomerate mergers will generally generate pricing efficiencies

by internalising the externalities that can otherwise harm consumer welfare.

Therefore, there is a sound argument for a presumption in favour of vertical and

conglomerate mergers.

(ii) Vertical and conglomerate mergers can also facilitate price-discrimination. To

the extent that this is the case, it should not be presumed to be anti-competitive.

Price discrimination can in some cases increase output and enhance consumer

welfare.

(iii) However, not all vertical and conglomerate mergers are benign. Some may raise

the possibility of foreclosure or raising rivals’ costs, thus damaging competition

and leading to higher prices for consumers.

(iv) In principle these types of foreclosure/raising rivals costs strategies are anti-

competitive and could, therefore, be pursued by the Commission, post-merger.

However, there may be cases where in practice (e.g. because of the difficulty of

establishing dominance) the Commission will be reluctant to wait to “see what

happens”, and will prefer to try to prevent the problem before it arises, if the

costs of the merger prohibition or remedies are not seen to be large.

(v) Vertical arithmetic provides a useful empirical approach to the assessment of

foreclosure concerns, and although it is a relatively complex and data-intensive

analysis if carried out thoroughly it seems clear that the Commission will make

use of this approach.

(vi) If significant competitive concerns remain after a full investigation, supply

commitments would be considered as possible solutions to any competitive

harm. However, in some cases divestments may be required.

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PART 7: THE TRADE-OFF EXCEPTION (PHASE 2 REVIEW)

Overview

7.1 Section 94(1)(b), (3) & (4) of the Act provide an exception to the positive

determination of a substantial prevention or lessening of competition. When a merger

substantially prevents or lessens competition, Section 94(1)(b), (3) & (4) of the Act

create a trade-off framework in which efficiency gains and public interest

considerations are evaluated against the anti-competitive effects that are likely to

result. Broadly, the Commission's approach will be to expeditiously identify those few

transactions that may raise substantial competition concerns and provide quick

clearance for remaining transactions to provide commercial certainty and allow parties

to achieve any efficiencies as quickly as possible. Consistent with that approach, a

thorough assessment of efficiency claims will be unnecessary in the vast majority of

the Commission's merger reviews.

7.2 As an initial matter, when determining the relevant anti-competitive effects for the

purpose of performing the trade-off, the Commission recognises the significance of all

of the objectives set out in the statutory objective clause contained in Section 1 of the

Act.

7.3 At Phase 2, the Commission will make an assessment of whether the efficiency gains

that are likely to be brought about by a merger will be greater than and will offset the

anti-competitive effects arising from that merger. The parties must be able to validate

efficiency claims to allow the Commission ascertain the nature, magnitude, likelihood

and timeliness of the asserted gains, and to credit (or not) the basis on which the claims

are being made. Conjunctively, the Commission will also assess the public interest

grounds or bases in any such case.

Process

7.4 By incorporating an explicit exception for efficiency and public interest gains, the

legislature has indicated that the assessment of the competitive effects of the merger

under section 94(2) of the Act is to be separated from the evaluation of efficiency gains

under section 94(3). This is the rationale for the Phase two review under the Merger

Review Regulations.

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7.5 That said, where merging parties undertake a self-assessment that indicates a

likelihood of SPLC, merging parties are encouraged to make their efficiency

submissions to the Commission as early as possible in the merger review process. This

facilitates an expeditious assessment of the nature, magnitude, likelihood and

timeliness of the efficiency gains and of the trade-off between relevant efficiency gains

and anti-competitive effects. Having detailed information regarding efficiency claims

at an early stage of the process will facilitate the preparation of focused follow-up

information requests and/or the targeted use of other information-gathering

mechanisms and, subject to confidentiality restrictions, enable the Commission to test

the claims during its market contacts regarding the merger. Submissions regarding

anticipated efficiency gains may also assist the Commission in understanding the

rationale underlying the proposed transaction.

7.6 In other instances, merging parties may choose to wait for a definitive conclusion as

to whether or not the merger is likely to result in an SPLC before providing detailed

information about efficiencies. This approach typically lengthens the Commission’s

review process since the assessment of efficiencies claims is iterative, and the

provision of a submission is only the first step in this assessment. While merging

parties might seek to hold back a submission until the Commission has made

determinations regarding the scope of the potential remedy or narrowed the scope of a

merger that is under review, this will come at the cost of time that could have otherwise

been spent engaging on the efficiencies claims.

Efficiency Test

7.7 Mergers can generate significant efficiencies by permitting a better utilisation of

existingassets,enablingthecombinedfirmtoachievelowercoststhaneitherfirm

couldhaveachievedalone.Efficienciesmayincreaserivalryinthemarketsothatno

adverse competitive effects would result from amerger. For example, this could

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happenwhere twoof thesmaller firms inamarketgainsuchefficiencies through

mergerthattheycanexertgreatercompetitivepressureonlargercompetitors.26

7.8 Efficienciesincludecostsavings,moreintensiveuseofexistingcapacity,economies

of scale or scope, or demand-side efficiencies such as increased network size or

productquality.Theymightalsoencompasspro-competitivechangesinthemerged

entity’s incentives, for example by capturing complementarities in R&D activity,

which in turn might increase incentives to invest in product development in

innovationmarkets.27

7.9 Although the Act specifically mentions technological efficiency, it identifies other pro-

competitive advantage. The Commission will analyse the three accepted categories of

efficiencies in its setoff analysis:

• allocative efficiency- the degree to which goods and services within the economy

are distributed according to consumer preferences.

• technical (productive) efficiency- the state where the optimal combination of inputs

results in the maximum amount of output at minimal costs.

• dynamic efficiency: the optimal introduction of new products and production

processes over time.

Types of efficiencies generally included in the trade-off:

A. Gains in productive efficiency

7.10 Productive efficiencies result from real cost savings in resources, which permit firms

to produce more output or better-quality output from the same amount of input. In

many cases, such efficiencies can be quantifiably measured, objectively ascertained,

and supported by engineering, accounting or other data, subject to a discount, as

26 ICN Merger Guidelines Workbook April 2006 Page 61 27 ibid

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appropriate, for likelihood in practice. Timing differences in the realisation of these

savings are accounted for by discounting to the present value.

7.11 Productive efficiencies include the following:

• cost savings at the product, plant and multi-plant levels;

• savings associated with integrating new activities within the firm; and

• savings arising from transferring superior production techniques and know-how

from one of the merging parties to the other.

7.12 Information regarding gains in efficiency that relate to cost savings should be broken

down according to whether they are one-time savings or a recurring savings. When

considering cost savings, the Commission will examine claims related to the

following:

• economies of scale: savings that arise from product- and plant-level reductions in

the average unit cost of a product through increased production;

• economies of scope: savings that arise when the cost of producing more than one

product at a given level of output is reduced by producing the products together

rather than separately;

• economies of density: savings that arise from more intensive use of a given network

infrastructure;

• savings that flow from specialisation, the elimination of duplication, reduced

downtime, a smaller base of spare parts, smaller inventory requirements and the

avoidance of capital expenditures that would otherwise have been required;

• savings that arise from plant specialisation, the rationalisation of various

administrative and management functions (e.g., sales, marketing, accounting,

purchasing, finance, production), and the rationalisation of research and

development activities; and

• savings that relate to distribution, advertising and raising capital.

B. Gains in dynamic efficiency

7.13 The Commission will examine claims that the merger has or is likely to result in gains

in dynamic efficiency, including those attained through the optimal introduction of new

products, the development of more efficient productive processes, and the improvement

of product quality and service. When possible, the assessment of dynamic efficiencies

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is conducted on a quantitative basis. This is generally the case if there is information

presented by the parties to suggest that a decrease in production costs as a result of an

innovation in production technology or an increase in demand for the parties' products

as a result of product innovation (leading to a new or improved product) is likely. To

supplement quantitative information or where quantitative information is absent, the

Commission conducts a qualitative assessment.

7.14 The specific environment of the industry in question will be important in the

Commission's analysis of the competitive effects of a merger on innovation. The

assessment will require specific industry information. Historical information on the

effect of previous mergers in the industry on innovation may be insightful. Such

information may relate to a merger's impact on the nature and scope of research and

development activities, innovation successes relating to new or existing products or

production processes, and the enhancement of dynamic competition. In addition, and

only when applicable, the Commission encourages parties to provide detailed

explanations regarding plans to utilise substitute or complementary technologies so as

to increase innovation.

C. Deductions to gains

7.15 Once all efficiency claims have been valued, the costs of retooling and other costs that

must be incurred to achieve efficiency gains are deducted from the total value of the

efficiency gains that are considered. For instance, integrating two complex, ongoing

operations with different organisational cultures can be a costly undertaking and

ultimately may be unsuccessful. Integration costs are deducted from the efficiency

gains.

Types of efficiencies generally excluded from the trade-off

7.16 Not all efficiency claims qualify for the trade-off analysis. The Commission will

exclude the following:

• gains that would likely be attained in any event through alternative means

(examples include internal growth, a merger with a third party, a joint venture, a

specialisation agreement, and a licensing, lease or other contractual arrangement);

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• gains that are redistributive in nature (examples include gains anticipated to arise

from increased bargaining leverage that enables the merging parties to extract

wage concessions or discounts from suppliers that are not cost-justified, and

tax-related gains);

• gains that are achieved outside Nigeria (examples include productive efficiency

gains arising from the rationalisation of the parties' facilities located outside

Nigeria that do not benefit the Nigerian economy); and

• savings resulting from a reduction in output, service, quality or product choice.

Evidentiary Requirements

7.17 To facilitate the Commission's review of efficiency claims, parties should provide

detailed and comprehensive information that substantiates the precise nature,

magnitude, likelihood and timeliness of their alleged efficiency gains, as well as

information relating to deductions from gains in efficiency, such as the costs associated

with implementing the merger. The information should specifically address the

likelihood that such gains would be achieved.

7.18 To enable the objective verification of anticipated efficiency gains, efficiency claims

should be substantiated by documentation prepared in the ordinary course of business,

wherever possible. This includes plant and firm-level accounting statements, internal

studies, strategic plans, integration plans, management consultant studies and other

available data. The Commission may also require physical access to certain facilities

and will likely require documents and information from operations-level personnel

who can address, among other matters, how their business is currently run and areas

where efficiencies would likely be realised.

Burden on the parties

7.19 The parties' burden includes proving that the gains in efficiency-

• are likely to occur. In other words, the parties must provide a detailed explanation

of how the merger or proposed merger would allow the merged firm to achieve the

gains in efficiency. In doing so, the parties must specify the steps they anticipate

taking to achieve the gains in efficiency, the risks involved in achieving these gains

and the time and costs required to achieve them.

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• are brought about by the merger or proposed merger (i.e., that they are

merger-specific). The test under section 92(3) is whether the efficiency gains would

likely be realised in the absence of the merger. Thus, if certain gains in efficiency

would likely be achieved absent the merger, those gains are not counted for the

purposes of the trade-off.

• are greater than and offset the anti-competitive effects. The parties must provide a

quantification of the gains in efficiency and a detailed and robust explanation of

how the quantification was calculated. They should also, to the extent relevant,

provide any information on qualitative efficiencies. While the burden is ultimately

on the parties to establish that the gains in efficiency are greater than and offset the

anti-competitive effects, in appropriate cases and when provided in a timely

manner with the parties' evidence substantiating their case, the Commission will

undertake its own assessment of the trade-off before deciding to approve or prohibit

the merger at Phase Two.

Public Interest Gains 7.20 In addition to efficiency gains, Section 94(3)(b), (4) of the Act requires the Commission

to consider public interest grounds to justify a merger that is likely to substantially

prevent or lessen competition.

7.21 As an initial matter, Section 94(3)(b) of the Act requires the public interest grounds to

be assessed under Section 94(4) of the Act to be substantial in nature. In all instances

the public interest claim must be specific to the merger.

Ground One- Particular Industrial Sector or Region28

7.22 There are considerations that are specific to certain sectors or industries. These

considerations may be relevant as public interest considerations in mergers. Some

examples are-

• Energy- ‘security of supply’, ‘stable provision of energy

• Media- ‘plurality of the media’

28 Section 94(3)(b) of the Act

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• Finance- ‘prudential rules’, ‘stability of the financial system’

• Defence- ‘national security’, ‘national defence’.

7.23 When assessing the substantiality of the effect on a particular industrial sector or region,

the Commission will, in general, consider the following factors:

• the importance and strategic nature of the relevant products to the sector or region,

and of the sector or region to the broader economy;

• the importance to a sector or region of the identified social projects and upliftment

programs proposed by the firms;

• the extent of the effects on the sector and related sectors in the entire value chain;

• whether the merger impedes or contributes towards any specific industry goal that

have public interest relevance in that sector or region; and/or

• the importance of a firm to the sector or region and the benefits that flow from that

firm to that sector or region.

Ground Two: Employment29

7.24 In determining whether employment is a substantial public ground, the Commission

will consider, among other, the overall nature of the transaction, including the extent of

overlap and duplication in the merging parties’ activities, the rationale of the

transaction, the intention of the parties relating to employment and the target business

as well as any plans to create further employment opportunities within the merged entity

and whether there is any planned retrenchment.

7.25 As a secondary consideration, the Commission will also consider the likely indirect

effect of the merger on the general level of employment in a particular industrial sector

or region. In assessing this effect, the Commission will consider whether the merger

impacts on the level of employment post-merger due to, among others, job creation or

29 Section 94(4)(b) of the Act

94

loss of job opportunities, duplications, cost-cutting measures, cancellation of

supply/distribution arrangements, and/or relocation of offices, plants and facilities.

7.26 In general, the Commission will accept those retrenchments or employment

opportunities declared by the merging parties to arise from the merger, as being merger

specific. The substantiality assessment will in general involve the consideration of the

following factors, where applicable:

• the number of employees that are likely to be affected relative to the affected

workforce;

• the affected employees’ skill levels. The Commission will consider information on

the affected employees’ qualification, experience, job grade, job description and

position within the organisation in determining the skill level;

• the likelihood of the employees being able to obtain alternative employment in the

short term considering various factors. In this regard, the Commission may assess

the possibilities for redeployment within the merged entity, the natural attrition rate

within the merging parties, the type of skills and their transferability to other

industries and businesses, the economics of the region and the opportunities for re-

employment in the region;

• the nature of the sector relevant to the employment effect, including whether the

sector employs largely unskilled employees, the unemployment rate in the sector,

whether the sector is experiencing a trend of retrenchments, whether the sector is a

mature or declining sector; and whether the sector is an emerging sector which

would suggest future employment opportunities; and

• The predominant nature of employment by the acquiring firm for example, whether

the parties employ seasonal or permanent employees, and/or are engaged in a

business that involves bidding or contracting.

7.27 The Commission will consider substantiality on a case by case basis and may exclude

management employees from the affected number of employees should it view these

employees as having alternative employment prospects in the short term. The

Commission will consider as substantial a large number of job opportunities created for

unskilled or semi-skilled employees in particular markets or sectors vulnerable to job

losses.

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Ground Three- the Ability of National Industries to Compete in International Markets30

7.28 In determining whether this is a substantial public ground, the Commission will

consider:

• The nature of competition and the market position of the firm in the domestic

economy;

• The ability of firms to compete in regional and global markets;

• Whether a change in productive capacity is required in order for the merged

firm to compete globally against other firms;

• The policy considerations that are relevant to the sector;

• the strategy of the merging firms in relation to international competition; and

• the impact on local consumers for both intermediate and final products.

7.29 When assessing the substantiality of any effect of a merger on a national industry’s

ability to compete in international markets, the Commission will consider, amongst

other factors:

• the role and importance of the national industry in the Nigerian market;

• the role and importance of the national industry or sector in the international

market/s;

• the relative structure and size of the national industry or sector by international

standards;

• the extent of the effect on the sector should the national industry’s ability to

compete in international market/s be hindered; and

• whether the merger impedes on any related public policy goals and relevant

industrial policies in relation to the national industry in question;

• a significant increase in the real value of exports or a significant substitution

of domestic products for imported products.

30 30 Section 94(4)(c) of the Act

96

7.30 Where the ability of national industries to compete in international markets will result

in significant positive economic effects/benefits that flow back to the domestic

economy, the Commission is likely to consider these to be substantial. These effects

could include further investment in the domestic economy, job creation opportunities,

the introduction of improved/advanced technologies and better quality/service, amongst

others.

7.31 To assist this analysis, firms operating in markets that involve international trade should

provide the Commission with information that establishes that the merger will lead

them to increase output owing to greater exports or import substitution.

Ground Four- the ability of small and medium scale enterprises (SMEs) to become

competitive31

7.32 In analysing this provision, the Commission will determine whether the merger has an

effect on any of the following factors that may have an effect on the ability of SMEs to

compete, among others:

• entry conditions or expansion opportunities within a market including raising or

lowering barriers to entry or expansion;

• prevents or grants access to key inputs; pricing and supply conditions with respect to

volume, discounts, quality, and services that are defensible having regard to prevailing

market circumstances;

• denies or grants access to suppliers;

• prevents or allows training, skills empowerment and development in the industry; and

• denies or grants access to funding for business development and growth.

7.33 Further, the Commission will amongst other factors consider

• dynamic competition, innovation and growth in the market;

31 31 Section 94(4)(b) of the Act

97

• whether such impediment limits the growth and expansion of SMEs and their

participation in the relevant market or adjacent markets. In addition, whether their

ability to compete allows them to expand in the relevant market or adjacent markets;

and

• whether any effect on SMEs has a secondary effect on other public interest factors

such as employment and the industrial/sector or region.

7.34 A positive assessment may be given where a merger has the effect of promoting

dynamic competition by significantly allowing the development and expansion of

SMEs that will exert a competitive constraint in relevant markets.

The trade-off

7.35 To satisfy the section 94(3)(a) trade-off, the efficiency and public interest gains must

both "be greater than and offset" the relevant anti-competitive effects.

7.36 The "greater than" aspect of the test requires that the efficiency gains be more extensive

or of a larger magnitude than the anti-competitive effects. The "offset" aspect requires

that efficiency gains compensate for the anti-competitive effects. The additional

requirement to "offset" makes it clear that it is not sufficient for parties to show that

efficiency gains merely, marginally or numerically exceed the anti-competitive effects

to satisfy the section 94 trade-off.

7.37 Both the efficiency gains and the anti-competitive effects can have quantitative

(measured) and qualitative aspects to them, and both the "greater than" and "offset"

standards apply to all anti-competitive effects. To enable appropriate comparisons to be

made, timing differences between measured future anticipated efficiency gains and

measured anti-competitive effects should be addressed by discounting to the present

value.

7.38 Merging parties intending to invoke the efficiencies exception are encouraged to

address how they propose that qualitative and quantitative gains and effects be

evaluated for the purpose of performing the "greater than and offset" aspect of the

trade-off; and to explain how and why the gains "compensate for" the anti-competitive

effects.

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All Enquiries to:

FEDERAL COMPETITION AND CONSUMER PROTECTION COMMISSION HEADQUARTERS (FCCPC)

C/o The Chief Executive Officer

No. 17 Nile Street, Maitama, Abuja.

Phone: 0805 600 2020, 0805 600 3030

contact@fccpc.gov.ng